The "shadow banking" system has been massively curtailed and is now half as big as it was before the 2008 crisis, a new report for the sector shows.
The shadow banking system encompasses the unregulated financial intermediaries traditionally seen to include more complex financial products and transactions which Deloitte identified as bank-like products including money market mutual funds, asset-backed commercial paper, collateralized debt obligations amongst others.
The system, which has no access to central banks or insurance, has come under increased scrutiny following the financial crisis of 2008 as regulators and the Federal Reserve have sought to rein in what many believe were the high risk unregulated activities which underpinned the crisis itself but crucially did not include hedge funds.
The quarterly index by Deloitte Financial Services revealed that the volatile system in the U.S. totaled $9.53 trillion at the end of 2011, a figure Deloitte said was below many estimates.
In the first quarter of 2008 the sector reached a peak of $20.73 trillion dwarfing the traditional banking sector’s assets of $15 trillion.
Adam Schneider, executive director of the Deloitte Center for Financial Services said hedge funds were an investment product and not bank-like so were not included.
He said the system had an impact on the regulated formal banking system and the index would provide a way of comparing and analyzing the shadow sector over time.
“With other size estimates ranging from $10 to $60 trillion for the U.S. market we think shadow banking is a concept continuing to look for a better definition.
The purpose of the index is it will allow a better measure of size, importance, effect of market and regulatory actions, as well as a way to assess the potential impact on regulated banking markets,” Schneider said.
He added that regulatory changes would likely be the number one influence on the sector – affecting its growth or decline but insisted the sector had a future.
“Given that major regulatory efforts have either been enacted or are in the works to help reduce the size of this important sector – like the Financial Stability Board’s recommendations expected later this year – this is a conversation the market needs to have,” he said.
Schneider insisted that the sharp decline in the sector did not indicate its eventual demise and it remained “valuable”.
“Some have been removed as they became more guaranteed activities and others have gotten smaller as economic conditions have indicated. These products are valid products they’re used by many institutions and have a lot of value. They’re like bank like products but without the protection. Hopefully we’re trying to understand them, size them and let participants weigh those risks appropriately,” he said.
He added that the index would include more products and services over time as the market evolves.