Unregulated Banking System in the Eurozone Second Largest in the World

The Eurozone ranks second in the world for unregulated activities in the banking system, valued at approximately €17.2 trillion in 2011, following the United States, European media reported on Monday, citing the latest report results.

The share of the U.S. in the global system of unregulated banking transactions decreased from 44 percent in 2005 to 35 percent in 2011. This reduction is largely mirrored in the increase of corresponding shares in the United Kingdom and the Eurozone,” reported the European news portal EUObserver, highlighting the findings of the Financial Stability Board (FSB), based in Basel.

Among individual countries, the largest share in Europe belongs to the United Kingdom, whose unregulated banking system was estimated at €7 trillion in 2011, while that of the U.S. reached €18 trillion, according to the FSB report published on Sunday.

The FSB oversees the implementation of measures in the global financial sector and stated in the report that the volume of the mentioned credit transactions, conducted outside the channels of the conventional banking system, continued to increase after the global financial crisis that shook the world from 2008 to 2011. These transactions are mostly unregulated and pose greater risks than traditional banking activities.

Companies engaged in these activities include open-ended investment funds, venture capital, pension and mixed funds, and securities markets. In certain cases, their share in financial activities is significant compared to that of standard commercial banks. Known as non-bank financial institutions, companies in the non-standard banking system compete with commercial banks in segments such as small business lending.

– The Netherlands (45 percent) and the U.S. (35 percent) are the two jurisdictions with the largest sectors of non-bank financial institutions compared to other financial institutions in the system – the FSB report emphasizes. For comparison, in the case of the Eurozone, the share of non-bank financial institutions constitutes approximately 30 percent.

The assets they generate are enormous. In the Eurozone, their value amounts to 111 percent of the total GDP of the 17-member bloc, in the United Kingdom 370 percent of GDP, and in the Netherlands, it reaches as much as 490 percent of GDP.

– Such concentration can partly be explained by the fact that these jurisdictions are significant financial centers that have hosted foreign institutions – the report states.

The total assets of the global non-standard banking system sharply increased in the period before the outbreak of the global financial crisis, rising from €20 trillion in 2002 to €48.5 trillion in 2007. After briefly decreasing to €46 trillion in 2008, it has been steadily increasing in recent years, reaching €52.5 trillion in 2011.