IMF calls for more oversight of shadow banks

The International Money Fund ( IMF) on Wednesday urged countries to include oversight of shadow banking as part of their policies designed to keep the overall financial system safe.

"Shadow banking is both a boon and a bane for countries, and to reap its benefits, policymakers should minimize the risks it poses to the overall financial system," said the IMF in its latest Global Financial Stability Report.

As one of the major contributors to the financial turmoil six years ago, shadow banking accounted for at least a third of total systemic risk similar to that of banks in the United States right now, said the report.

In the euro area and the United Kingdom, shadow banking's contribution to systemic risk is much smaller relative to the risks arising from their banking system as regular banks still dominate their financial systems, according to the report.

The IMF said the degree of shadow banking oversight and regulation should depend on how much it contributes to systemic risk, which requires supervisory authorities and statistical agencies to provide much more detailed data. It stressed that international regulatory cooperation is also crucial to prevent migration of high risk activities from countries with tight rules to others with laxer rules.

According to the report, shadow banking amounts to between 15 trillion and 25 trillion U.S. dollars in the United States, between 13.5 and 22.5 trillion dollars in the euro area, and between 2.5 and 6 trillion dollars in Japan, depending on the measure.

Shadow banks act similarly to regular banks by taking money from investors and lending it to borrowers, but are not governed by the same rules or supervised. Shadow banks can include financial institutions such as money market mutual funds, hedge funds, finance companies, and broker/dealers, among others.

In emerging markets, for instance, shadow banking business has reached about 7 trillion dollars and the growth is outpacing that of the traditional banking system, said the report.