The shadow banking system is booming

Size of shadow banking system, absolute, % of GDP, 2002 to 2012

The Financial Stability Board (FSB) published some interesting research yesterday regarding the overall size of the Shadow banking system. The chart above shows the size of the shadow banking system in absolute terms (blue line) and in terms of % of GDP (red line), over the past decade. The original FSB report is is here [ .pdf ], while a less detailed and a more accessible Reuters article is here.

A few key points

  • The Shadow banking system comprises the totality of unregulated financial market participants (e.g., hedge funds, sovereign wealth funds, etc)

  • Shadow banking system is now estimated at $67T, comped to $62T before the credit crunch

  • Shadow banking in the US is sized at $23T, in the Eurozone $22T, and in the UK $9T

  • Because shadow banking is unregulated failure of one counterparty can “ripple” throughout the system, impacting an increasingly larger number of apparently unrelated counterparties in a very, very short period of time – much like we saw in 2007.

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