Spotlight on Australian shadow banking

There’s plenty of attention on China’s shadow banking sector to understand its size and its links with the regulated banking sector. The same questions apply to Australia’s unregulated financial system.

The Australian Prudential Regulation Authority (APRA) has oversight of authorised deposit-taking institutions which covers banks, building societies and credit unions, as well as general and life insurance companies, reinsurance companies, friendly societies and most of the superannuation sector.

The Australian Taxation Office (ATO) has responsibility for the country’s $506 billion self-managed superannuation funds.

In combination those prudentially-regulated areas of the financial system account for more than $5 trillion of assets. Authorised deposit-taking institutions represent just over 50 per cent of that, according to data compiled by boutique research and consulting group Digital Finance Analytics.

ASIC's jurisdiction

Sitting beyond the regulation of APRA and the ATO are financial services firms that range from general insurance intermediaries to discretionary mutual funds, wholesale funders, most of which are securitisers, and registered finance corporations. These all come under the eye of the Australian Securities and Investments Commission (ASIC).

Registered finance corporations operate in areas including consumer finance, motor vehicle finance, equipment leasing and investment banking. Payday lenders and debenture-funded companies such as Banksia Securities and Gippsland Secured Investments are examples of registered finance corporations that fall into ASIC’s jurisdiction.

The assets of this diverse group which makes up Australia’s shadow banking sector peaked at slightly less than $900 billion in mid-2007. Since then it has shrunk dramatically to around $500 billion, putting it around one-tenth the size of the regulated sector.

Those assets range from shares, which account for around 30 per cent, to overseas assets (18 per cent), deposits (15 per cent), units in trusts (10 per cent) and short-term securities (six per cent) to loans and placements (two per cent) and derivatives (0.08 per cent), according to Australian Bureau of Statistics data.

Shadow banking risks

Martin North, founding principal and banking sector analyst at Digital Finance Analytics, said it is difficult to know to what extent those assets in the non-prudentially regulated sectors have the characteristics and risks of shadow banking. Cash management trusts and unlisted property or mortgage trusts, for example, are probably linked to credit flows and risks.

It is no clearer how interconnected those non-prudentially regulated financial entities are with the sectors regulated by APRA and the ATO. North’s best estimate is that five per cent of Australian bank assets are exposed to shadow bank intermediaries and that 18 per cent of shadow banking assets in Australia are exposed to the banks.

He advocates testing the assumptions that shadow banking in Australia is small and getting smaller and the Reserve Bank of Australia’s argument that entities regulated by APRA and the ATO should be treated as not being part of shadow banking.

“It is likely that shadow banking will continue to evolve and the superficial clarity implied by the regulators in Australia may belie the complexity which exists below the surface,” said North. “The truth is the financial complexity is the friend of the investment banker, and the more complex the structures, the less likely it is the full risks of transactions will be understood by the regulators.”

shadow banking, ATO, ASIC, APRA, Digital Finance Analytics
Marion Williams,
Article Posted:
February 06, 2014

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