Provide insights and opinions on the concepts - Shadow Banking and FinTech. I will provide a few examples. Please do not copy.
6 JASSA The Finsia Journal of Applied Finance ISSUE 3 2015 GLOBAL SYSTEMIC RISK: What’s driving the shadow banking system? Financial Stability Board (FSB) reports indicate that the global shadow banking sector (SBS) is increasing in size (see FSB 2013, FSB 2014a) and was estimated at US$71 trillion in 2013, equivalent to 117 per cent of the GDP of all jurisdictions studied by the FSB. This represented an increase of about $US5 trillion from the previous year (FSB 2013). In 2014, this sector grew to $US75 trillion, equivalent to 120 per cent of the GDP of all jurisdictions, however, the FSB notes that this is a conservative estimate (FSB 2014a). Advanced economies continue to have the largest non-bank financial systems, but emerging markets have experienced the most rapid increases in non-bank financial system assets (FSB 2014a). A recent study by Moshirian (2014) highlights the role of the shadow banking sector in an emerging new global financial system. There are a number of forces that have been identified as driving the activity of the SBS.1 In response to tightened financial regulation, international shadow bank regulatory arbitrage may grow in the future (Adrian et al. 2012). The growth of the SBS is widely seen as a response to increased regulation, and increased regulation may also have the counter-effect of driving innovation in the SBS (Adrian and Ashcraft 2012). The growth of the SBS has been driven by a number of different factors both before and after the financial crisis of 2007−08 (Tarullo 2012). A rise in demand by investors for safe, liquid assets as tools for precautionary or transactional liquidity, coupled with a rise in demand for short-term financial planning by certain borrowers, may have led to a surge in the volume of dollar-denominated seemingly ‘safe’ and ‘liquid’ financial instruments (Tarullo 2012). These instruments were created by shadow banking institutions in the form of asset-backed commercial paper (ABCP), repurchase agreements and the like (Tarullo 2012). While the financial crisis severely reduced the size of the SBS, it is likely that general economic growth will be accompanied by growth in existing shadow banking channels, as well as the creation of new channels in this sector (Tarullo 2012). More traditional sources of risk, such as excesses in leverage and in maturity/liquidity transformation are still relevant when identifying problem areas within the SBS (Caruana 2014). Furthermore, rules and procedures themselves are credited with being causes of innovation in financial markets (Caruana 2014). Similarly, some commentators point to the growing importance of the capital market in the supply of credit, particularly in the US, as a consistent source of growth for the SBS (Adrian and Shin 2009). Driven by the tightening of banking regulations, the global shadow banking system continues to grow steadily in size and scope. This paper discusses issues related to the shadow banking system, focusing on Asia and China in particular. The paper highlights the increasing importance of the shadow banking industry in Asia and factors that will contribute to its expansion in the immediate future. The paper compares and contrasts shadow banking in the US and China. It also highlights the risks associated with shadow banking, including leverage risk, maturity and liquidity mismatch, and regulatory arbitrage. ROBERT ENGLE, Professor of Finance at the Stern School of Business, New York University, New York and 2003 Nobel Laureate in Economics FARIBORZ MOSHIRIAN, Professor, Director of the Institute of Global Finance, UNSW Business School CHRISTOPHER S WONG, Research Associate, Institute of Global Finance, UNSW Business School 7 JASSA The Finsia Journal of Applied Finance ISSUE 3 2015 The developing economies of Asia and China are by no means immune to the growth of shadow banking that is occurring in developed Western economies (Schwarcz 2013). Indeed, the shadow banking sector in China has been receiving particular attention from a wide range of sources (Adrian et al. 2013; FSB 2014a; Schwarcz 2013). Shadow banking in Asia In 2014, the FSB released a comprehensive report on shadow banking in Asia, derived from the work of its Regional Consultative Group for Asia. The report found that of selected Asian region nations, ‘non-bank financial intermediaries’ (NBFIs) represented approximately 12 per cent of total financial system assets in 2011 (FSB 2014a).2 Using data for a similar selection of Asian nations,3 this figure remained relatively unchanged at approximately 11 per cent as at the end of 2013 (FSB 2014b). However, due to the diverse nature of Asian economies, such averages do not necessarily reflect the situation within individual nations (FSB 2014a). Generally, the ‘other financial intermediary’ sector represents less than 25 per cent of total financial system assets across most Asian economies (FSB 2014a). The report also noted that in most Asian economies banks continue to hold a large share of financial system assets, accounting for at least half of financial system assets in most jurisdictions (FSB 2014a). There have been a number of different estimates of the size of the shadow banking system in China. In 2015, Moody’s Investors Service estimated that China’s shadow banking assets reached 41 trillion yuan at the end of 2014. Other estimates include 30 trillion yuan (Yi 2013), 31 trillion yuan (Sheng et al. 2015), and 36.8 trillion yuan (Barboza 2013), among others. The FSB reported in 2014 that the Chinese shadow banking system was one of the fastest growing in the world, with annual growth rates in 2012 and 2013 reaching 42 and 34 per cent, respectively (FSB 2014b). Problematically, both the FSB estimates and the monitoring process for the Chinese SBS have come under criticism for their failure to address the opacity of the Chinese financial system, as well as the constantly changing regulatory environment of Chinese finance (Borst 2014). The different estimates of the size of the Chinese SBS from various sources point to inherent difficulties in estimating this market, and highlight the fact that each estimate must be interpreted with its methodology and dataset in mind (Borst 2014; FSB 2014a). Interestingly, the FSB has reported that Chinese non-bank financial intermediaries make up only 4 per cent of the assets of non-bank financial intermediaries in 2012 (FSB 2014b). This pales in comparison to the 33 per cent share of the US and the 34 per cent share of the euro zone area (FSB 2014b). This can be partially explained by the fact that Chinese institutions are not wholly non-bank, but rather are regulated banks that operate as both shadow and regulated credit intermediaries (Adrian et al 2013). With regard to other Asian economies, the FSB has reported that ‘other financial intermediaries’ make up 15 to 30 per cent of total financial system assets in India, South Korea, Malaysia, Singapore and the Philippines (FSB 2014a). In Hong Kong the corresponding figure is over 30 per cent (FSB 2014a). FIGURE 1: Annual growth of non-bank financial intermediaries 20132012 Y ea r- on -y ea r g ro w th r at e (c on tr ol lin g fo r F X e � ec ts ) B y ju ris d ic tio n, in p er c en t (% ) E xh ib it 3– 2 0 10 20 -20 -10 30 40 50 A rg en tin a C hi na Tu rk ey So ut h A fr ic a In d ia R us si a Sa ud i A ra b ia Ja p an M ex ic o Si ng ap or e K or ea C an ad a C hi le U ni te d S ta te s H on g K on g 1 B ra zi l In d on es ia Sw itz er la nd E ur o A re a A us tr al ia N et he rla nd s U ni te d K in g d om F ra nc e It al y G er m an y Sp ai n To ta l2 1. The basis of calculating 2012 growth rate of HK’s OFIs is di�erent from that of calculating 2013 growth rate, due to the data unavailability of HK’s Finance Companies’ assets. 2. Weighted average of 20 jurisdictions and euro area. Source: Global Shadow Banking Monitoring Report 2014, Financial Stability Board 2014. 8 JASSA The Finsia Journal of Applied Finance ISSUE 3 2015 Overall in Asia, shadow banking has been reported to be on the rise (Schwarcz 2013). Schwarcz (2013) notes that the nature of shadow banking in Asian economies is not as much about ‘long, complex, opaque chains of intermediation’, but rather about banking activities that are weakly regulated or falling outside the regulatory sphere altogether. FIGURE 2: Other financial intermediaries (OFIs) trends HK US EA All KR MY IN TH PK ID All KH CN Select economies P er ce nt ag e (% ) P er ce nt ag e (% ) 2002 2008 2002 2008 Other Asian economies 0 10 20 30 40 0 5 10 15 20 SG UK AU JP CA *Total for non-Japan Asia does not include data for Singapore between 2002–2004, which was unavailable; EA = euro area Source: Report on Shadow Banking in Asia, Financial Stability Board 2014. The shadow banking system in China The shadow banking system in China is described as having a different operational aspect from that in the US (Hsu and Li 2012; Schwarcz 2013). Also less diversified and complex than in the US (Schwarcz 2013), the Chinese SBS is characterised by shadow banks, trust companies, small loan companies, bonding companies, financial companies and financial leasing companies, as well as the informal financial system (Hsu and Li 2012). Hsu et al. (2014) indicate that the Chinese shadow banking system operates on three levels: > commercial and investment banking, including banks which sell trusts, wealth management, and other shadow banking products, financing leasing companies, and insurance brokerage firms > quasi financial institutions such as micro loan companies, financial guarantee companies, and pawn shops > informal financial institutions. In this regard, the Chinese SBS is a mixture of regulated financial institutions operating in shadow finance and non-banking financial institutions (Hsu et al. 2014; Hsu and Li 2012). Schwarcz (2013) notes that the Chinese SBS encompasses property development trusts, credit associations, rural cooperative foundations, pawn shops and peer-to-peer business lending. The provision of financing by banks using non-traditional means (such as wealth management funds) is also included as part of shadow banking (Schwarcz 2013). Ghosh et al. (2012) indicate that the main forms of shadow lending include informal lending as well