Banking registers “rapid growth” regardless of regulation

Mexico City. Shadow banking is registering “rapid growth” outside of regulation such as that of regulated financial institutions. Last year, this money leaving investment funds for corporations exceeded $2.1 trillion worldwide last year in assets and committed capital.

Pension funds and insurance companies are investing in these types of schemes because of the returns they offer. However, “given that this ecosystem is opaque and highly interconnected, and if rapid growth continues with limited supervision, existing vulnerabilities could become a systemic risk for the broader financial system,” the IMF warned.

The organization explains that this market emerged three decades ago as a source of financing for companies too large or risky for commercial banks and too small to borrow in public markets; But their credit quality is not always clear or easy to evaluate, and the non-transparent interconnections between private credit funds, companies, commercial banks and investors “may be accumulating systemic risks.”

The IMF recognizes that the immediate risks to financial stability from private credit currently appear limited, but “serious data gaps make it difficult to monitor these vulnerabilities in financial markets and institutions and may delay adequate risk assessment by authorities and investors.”

For example, companies that tap the private credit market tend to be smaller and have more debt than their counterparts with leveraged loans or public bonds. With interest rates rising in recent years, more than a third of borrowers now have interest costs that exceed their current earnings.

This is only one of the risks reported by the agency. It highlights that currently there is no observed “a systemic risk for the financial sector in general”, derived from lending funds, vulnerabilities “may continue to accumulate, with implications for the economy.”

“In a severe crisis, credit quality could deteriorate dramatically, leading to defaults and significant losses. “Opacity could make these losses difficult to assess,” he highlighted.