DBRS Morningstar Releases Commentary on Shadow Banking in Canada and the Challenges it Poses in the Coronavirus Crisis

DBRS Limited (DBRS Morningstar) published a commentary outlining the trajectory of the Canadian shadow banking sector, which has been growing at a rapid pace since the 2008–09 financial crisis, outpacing the growth of the country's dominant banking sector. This growth has predominantly been driven by the funds segment, which has increased in tandem with the growth of the wealth of individuals, encouraged in particular by the growth of their retirement accounts. Low interest rates and the search for yield have also been key drivers.

All in all, the growth of the shadow banking sector could pose a challenge for Canada because, especially in the current uncertain environment, disruptions from nonbank financial institutions could have a widespread impact on the financial system at large.

Key highlights include:
-- The shadow banking sector in Canada has been growing at a faster pace than the banks and its global peers since the financial crisis to reach $1.5 trillion in 2018.
-- The main driver of growth has been fixed income and other funds. This segment poses financial stability risks primarily due to funding mismatches as well as leverage and credit risks.
-- In Canada, the shadow banking sector has similar characteristics to the U.S. rather than Australia. Though the banking systems in Canada and Australia are similar, Australia has a smaller shadow banking sector that is more connected with regulated institutions than in Canada.
-- In a stressed environment, withdrawals, funding difficulties, and other disruptions for nonbank financial institutions could have a widespread impact on the financial markets. With the heightened uncertainty surrounding the spread of the coronavirus, that stressed environment is here and it is having an impact.

“Since the financial crisis, the Canadian shadow banking sector has developed similar characteristics to that of the U.S. This is juxtaposed against the shadow banking system in Australia, a country whose banking system is very similar to that of Canada. Australia has a smaller shadow banking sector than Canada; however, nonbank entities are more connected with the larger banks and regulated institutions than in Canada,” said Maria-Gabriella Khoury, Senior Vice President, Global FIG.

Notes:
A copy of this commentary is available at www.dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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