J.L.M. Campuzano (Spanish Banking Association) | At the end of last week, the ECB President expressed his concern about the “strong growth” in the non-banking financial sector. In the face of the complex and strict regulation governing the banks, also taking into account the thorough supervision process in place, Draghi flagged the limitations in both areas for the rest of the financial sector.
A year ago, the ECB published its report on the structure of Europe’s financial sector. Included in this structure are the banks, the insurers, pension funds, as well as other financial intermediaries. This last group is known as “shadow banking”. At end-2015, the size of the financial sector in Europe was 68.5 trillion euros. Of these total assets, 46% corresponded to the banks and 39% to the shadow banks. Within this group of other financial intermediaries, investment funds account for 15% of assets.
How did the financial sector’s structure evolve during the crisis? Compared with the deleveraging and resizing witnesssed in the banking industry in the last decade, the rest of the financial sector has seen strong growth.
The non-banking sector currently accounts for 54% of total assets versus 42% in 2008. Specifically, the shadow banks (without a pool of money) accounted for 39% of total assets a year ago (29% in 2008). In absolute terms, the investment fund sector has doubled when the rest have grown 25%.
It’s also significant, obviously, that the size of the non-banking assets has increased strongly over the period, against a backdrop of deleveraging on the part of companies, households and banks. During the crisis it went from 5,3 times GDP in 2008 to 6,1 times in 2015. And it’s more than likely that it has continued to grow in relative terms in the last year.
There also important differences in the evolution of the financial sector as a whole in the period under review. In Germany and Spain it has decreased, while it has grown in Italy and in France.
What is interesting is that it’s precisely in Germany and Spain, amongst the big countries, where the banks still maintain their weighting in absolute terms and in relation to their products.
One last question, how is the funding for non-financial companies distributed in the financial sector?
If companies receive 70% via external financing, 56% corresponds to loans and 27% to shares. And 70% of the banks within the loans segment. The banks also hold 20% of debt. And less than 8% of the shares.
The weighting of domestic bank financing for companies is particularly important in countries like Spain…
Should the ECB be worried about the strong growth in the non-banking financial sector? Draghi definitely expressed his concern, as other international institutions like the BIS have been doing for some time now. The ECB is calling for cautious macro measures to limit risks. But it defends exceptional expansionary monetary policy which it considers is still necessary for the time being.