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Global investment funds have made Ireland a world capital for shadow banking

The sector is more than 10 times the size of the Irish economy.

IRELAND’S SHADOW BANKING sector continues to grow, and is now one of the largest in the world.

According to new statistics from the CSO, companies in Ireland’s so-called ‘shadow banking’ sector held an estimated €2.9 trillion worth of assets in 2015, up from €2.3 trillion the year before.

Shadow banking typically refers to financial companies that perform bank-like activities, but are not regulated like a bank. Examples include mobile payment systems, investment funds and asset management firms.

While many companies and investment vehicles in the shadow-bank sector are regulated, the degree of oversight tends to vary between jurisdictions.

Critics worry about the sector due to the fact that, unlike a lot of traditional banks, the practises of shadow banks can obscure risks while also allowing the beneficiaries of transactions to go without proper vetting.

However, the shadow-banking system is also essential to the global financial system as it provides credit to individuals and businesses in areas where traditional banking does not. Ireland has one of the biggest shadow-banking sectors in the world.

Shadow banking centre

According to the Financial Stability Board, a group of global regulators, Ireland ranks only behind the likes of China, the UK and US when it comes to the world’s biggest centres for shadow banking.

The local industry’s size in 2015 was more than 10 times the value of the country’s entire economic output. Ireland is also one of the few countries in the world which has a shadow-banking sector that is bigger than the domestic banking industry.

This is due to the international nature of the shadow-banking sector in Ireland, which has limited linkages to the domestic economy. Most companies in Ireland’s shadow-banking sector do the bulk of their business outside the country.

DUBLIN IN FEBRUARY 2006 Many finance firms are based in the IFSC Source: William Murphy

Until late 2015, special-purpose vehicles operating in the country didn’t have to tell the regulator, the Central Bank, that they were in Ireland unless their activities crossed over with regulated areas.

Since then, Irish officials have been collecting information on shadow banking in an effort to understand the sector and the possible risks that it could pose.

According to the new statistics from the CSO, the entire financial sector in Ireland is estimated to have assets worth €4.6 trillion. After removing banks and financial auxiliaries such as insurance brokers, this estimate drops to €3.9 trillion.

Expansion

The CSO then discounted several different types of financial organisations, such as pension funds and equity investment funds, to get an estimate of €2.9 trillion for the shadow banking sector.

“The remaining provisional estimate is large, though this is reflective of the type of behaviour present in the Irish economy,” it said.

The CSO said there was an expansion of the shadow banking sector between 2013 and 2015, which it said was largely driven by the increase in the ‘non-MMF investment funds’ sector.

Non-MMF investment funds refer to all funds except for money market funds. Assets held by these bodies rose from €1.2 trillion in 2013 to almost €1.8 trillion in 2015.

The statistics body said future work will try to get more information on different sectors in the shadow-banking system.

“This may be useful to monitor to what extent the relevant units are engaged in shadow banking activities,” the CSO said.

It said that more information on the shadow banking industry “may reveal to what extent assets in the financial system are financed by the financial system itself and what part is transferred to final investors outside the financial system”.

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Written by Paul O’Donoghue and posted on Fora.ie

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