Swiss shadow banking risk smaller than expected

Shadow banking is largely to blame for the sub-prime mortgage crisis of 2007 and the global recession that followed Keystone

A case study on shadow banking in Switzerland reveals that the sector is nearly five times smaller than expected. This in-depth analysis indicates a low risk to the financial stability of the country.

A detailed case study on the country carried out by the Financial Stability Board (FSB), an international body that assesses financial vulnerabilities, shows that the risk associated with exposure to the shadow banking sector is low. The case study is a part of the Global Shadow Banking Monitoring Report 2014External link released by the FSB on Thursday.

Shadow banks are non-bank financial intermediaries that provide services similar to conventional banks. These include hedge funds, mortgage companies, investment banks, etc. that operate outside the banking system and are not as well regulated as traditional banks.

Measured relative to Gross Domestic Product (GDP), the Swiss shadow banking sector is the third largest worldwide, with CHF1,502 billion ($1,571 billion) in financial assets or around 250% of GDP. However, the more specific approach of the case study estimates this share to be as low as CHF315 billion that corresponds to 53% of GDP.

The case study also states that shadow banking assets in Switzerland carry a low to moderate bank-like systemic risks. In addition, the majority of shadow banking assets such as bond funds and other investment funds, are closely monitored by the Swiss Financial Market Supervisory Authority (FINMA).

Despite the low risk indicated, the shadow banking sector needs to be closely monitored by Swiss authorities due to its inter-connectedness with the regular banking system and the demands made by emerging international regulatory standards, the case study concluded.