Increase in shadow banking activities seen as potential threat to Irish economy

Ireland is one of the largest centres for so-called shadow banking activity in the world, which could threaten the country's economic stability and traditional banking system.

Credit ratings agency Fitch has warned that while the health of the global banking system has improved since the financial crisis, the rise in shadow banking means risk "has not necessarily been reduced."

Shadow banking refers to non-traditional banking activities and institutions including special purpose vehicles, hedge funds, crowdfunding, offshore trusts and money market funds.

Ireland ranks sixth in the world for shadow banking assets - the value of assets held here being 14 times the country's GDP and making up 5.4% of the world's shadow banking assets.

The US remains the largest centre for shadow banking activity in the world - housing $14.9 trillion in assets - but its share is declining. China, the Cayman Islands, Luxembourg, Japan and Ireland have the next five highest shares.

"Shadow banking's ascension may signal growing systemic risks. These could include direct and indirect exposures faced by banks, insurance companies and pension funds, reduced financing availability for banks and non-financial corporate borrowers, and increased asset price volatility," Fitch said.

Reducing shadow bank risk could be achieved through further direct regulation and more transparent financial reporting, Fitch said.

However, it said:

"A more comprehensive regulatory framework most likely won't exist beyond specific countries - for example China or India - or sub-sectors, such as consumer finance, unless and until necessitated by a market-wide shock correlated to shadow banking."

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