DBRS Morningstar: Shadow Banking Saved by Central Banks in COVID-19 Crisis But Risks Still Remain

NEW YORK--()--DBRS, Inc. (DBRS Morningstar) published a commentary analyzing the impact of the Coronavirus Disease (COVID-19) pandemic on the shadow banking industry. In a stressed environment, withdrawals, funding difficulties, and other disruptions at shadow banks can have a widespread impact on the markets. Positively, extraordinary measures taken by central banks to inject liquidity into the markets over the past year prevented the potentially adverse impact to the markets that could have been elevated to extreme levels absent this support.

Key highlights include:

  • At $57 trillion in total assets, shadow banks are substantial participants in the global financial system. Collective investment vehicles (CIVs), a significant component of shadow banking assets, are susceptible to runs on liquidity. At the onset of the pandemic, funding markets were stressed and demand for liquidity increased, leading to large outflows from CIVs.
  • The extraordinary measures of support provided by the central banks contributed to staving off further fund withdrawals, alleviating funding pressures, supporting credit quality and limiting defaults. However, CIVs still pose a risk in terms of funding mismatches, investing in longer maturity assets and allowing investor redemptions.
  • Shadow banking asset growth outpaced bank asset growth in 2019. However, shadow banking assets are expected to decline in times of stress while central bank and bank assets grow. This occurred in 1Q20, as central bank and bank balance sheets expanded while non-bank assets contracted.

“We see significant risk in shadow banks due to their increasing size, lack of robust global regulation and inconsistent reporting/lack of transparency. We know that significant risk has moved off bank balance sheets into non-banks post-financial crisis. The extent of this risk is difficult to measure,” said Man Na Cheung, Assistant Vice President.

To view the full report, click here: https://www.dbrsmorningstar.com/research/378180/shadow-banking-saved-by-central-banks-in-covid-19-crisis-but-risks-still-remain

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Contacts

Media
Stephen Bernard
Vice President, Corporate Communications
+1 212 806 3240
Stephen.bernard@dbrsmorningstar.com

Contacts

Media
Stephen Bernard
Vice President, Corporate Communications
+1 212 806 3240
Stephen.bernard@dbrsmorningstar.com