Irish ‘shadow banking’ worth €2,250bn at end of 2014 - study

Investment funds domiciled in Ireland most significant component of shadow sector

Dublin’s IFSC, where much of the Irish investment funds industry is based. Photograph: Bryan O’Brien / The Irish Times

Dublin’s IFSC, where much of the Irish investment funds industry is based. Photograph: Bryan O’Brien / The Irish Times


hadow banking in the Republic amounted to €2,250 billion at the end of last year, or some 1,190 per cent of the State’s GDP, according to an analysis published on Thursday by the Financial Stability Board in Switzerland.

The board said this involved “significant interconnections with the international financial system” with almost half of the sector outside the “regulatory perimeter”.

“Initiatives at the European and Irish levels are set to further improve regulatory oversight of securitisation vehicles, money market funds and the residual other financial intermediaries sector,” the FSB said.

“Going forward, improved monitoring of shadow banking, both internationally and in Ireland, will require increased regulatory oversight and co-ordination across jurisdictions.”

This is the first time that Ireland has participated in this study by the FSB, which found that the total financial sector amounts to €4,054 billion, with 81 per cent of this activity outside of the regular banking system.

In the context of this study, shadow banking is considered to be “credit intermediation” involving entities and activities outside the regular banking system”.

Investment funds

The FSB said investment funds domiciled in Ireland make up the largest component with about €1,634 billion in assets. This figure doubled between 2011 and 2014, driven mainly by positive asset revaluations of €613 billion on the back of buoyant debt and equity markets.

The FSB, which is chaired by Bank of England governor Mark Carney, said the majority of investment funds are governed by a conservative investment strategy under existing European regulation.

“Nevertheless, hedge, mixed and other fund types tend to have more aggressive investment strategies and while most of these funds are not significantly leveraged, “pockets of heightened risk exist among a cohort of highly leveraged hedge funds and exchange traded funds”, the FSB said.

A “simple run risk” test on these funds to see if they could meet both a 10 per cent investor redemption request and the withdrawal of leverage callable within one week at current market prices showed that 6 per cent of the industry in Ireland would fail.

“We note a limitation of this analysis is the lack of granular data for the financial crisis in 2007-08,” the FSB added.

Domestic supervision

Hedge funds account for 10 per cent of all investment funds and represent around half of the leverage in the industry, the study found.

The study noted that while most of these funds are authorised and supervised by the Central Bank of Ireland, the investment managers are generally located in other countries and subject to domestic supervision.

Money market funds domiciled here have increased by €58 billion or 20 per cent in the past three years and amounted to €395 billion at the end of last year.

These invest in money market instruments and engage in securities financing transactions.

Irish domiciled financial vehicle corporations, which include the National Asset Management Agency, have decreased by €98 billion in the past three years to €402 billion while insurance companies and pension funds together account for €350 billion in assets.

Other financial intermediaries, which includes treasury companies, finance leasing companies, holding companies and certain special purpose vehicles, amounted to €498 billion.

The FSB board said granular balance sheet data on these entities was not available, adding that the Central Bank planned to extend data collection in this area from the third quarter of this year.