The shadow banking system is down but not out. That's the conclusion reached by the Deloitte Center for Financial Services in a new report that examines the scope and the relevance of a sector that has received its fair share of blame for causing the financial crisis.Deloitte says that assets controlled by the shadow banking system — including ABS and MBS —have declined by more than 50% in the last four years, to $9.53 trillion at Dec. 31. As a result of this sharp decline, the traditional banking sector that four years ago was smaller than the shadow banking system is now roughly $8 trillion larger, according to Deloitte.
The report's authors said they expect the shadow banking system to remain suppressed in the near-term due to the volatile state of the economy and an uncertain regulatory climate. But, they added, "it is unlikely it will cease to exist; repurchase agreements and securities lending, to name two components, are vital to the functioning of a modern financial system and will likely bounce back eventually."
The report, released earlier in the week, was the first of regular quarterly reports Deloitte plans to produce on the topic of shadow banking. In its executive summary, the consulting firm said the purpose of the report dubbed the Deloitte Shadow Banking Index is to "more closely measure size, importance, effect of market and impact of regulatory actions, as well as a way to assess the potential impact of shadow banking on regulated markets."
For now, Deloitte will solely examine the shadow banking sector in the U.S., though it did not rule out including global markets in future studies.
Broadly, shadow banking is defined as a market-funded, credit intermediation system in which liquidity is provided through securitization and secured-funding mechanisms. Shadow banking entities exist at least partly outside of the traditional banking system and do not have access to deposit insurance or a central bank.