Ireland’s €5tn shadow banking world faces scrutiny

• Date: 19 December 2020
• Author: Joe Brennan
• Published date: 19 December 2020
• Publication title: Irish Times (Dublin, Ireland)

Irish-based money market funds, which housed €574 billion of global assets at the start of the year, suffered 10 per cent investor withdrawals that month as investors rushed to grab cash.

These types of funds have become an important part of the flow of money through the world economy in recent decades, allowing companies and governments to invest money in pools of short-term debt issued by other groups and sovereigns - in the hope of making marginally more money than putting cash on deposit in banks.

Some 45 per cent of euro-zone money market funds are based in the Republic's International Financial Services Sector.

None saw their cash reserves fall to levels that would have triggered rules brought in two years ago that could restrict investors cashing out. But some came dangerously close - before central banks started to pump trillions of euro into the financial system to keep the music going.

Money market funds, along with Irish-domiciled international investment funds, as well as more esoteric and largely unregulated entities, such as special purpose vehicles and collateralised loan obligations (CLOs), are part of a fast-growing area known as shadow banking - financial activity that goes on outside mainstream banks.

It's a world that an ecosystem of bankers, lawyers, accountants and other professional services firms in Ireland have made their own in recent decades. Hundreds of millions of euros in fees are up for grabs.

International body

The Financial Stability Board (FSB), an international body set up in 2010 to monitor the global financial system, estimated in a report published this week that shadow banking (a label it has stopped using in recent years, because of its perjorative connotations, replaced by the altogether snappier "non-bank financial intermediation") grew almost 9 per cent last year to $200 trillion (€164 trillion).

Shadow banking now accounts for half of financial assets in the world, having grown faster over the past decade than mainstream banks, which have been subjected to increased supervision and regulatory capital demands during the period.

The size of the non-bank finance sector in the Republic was almost €5 trillion last year, based on the FSB's estimate that it amounted to 14 times the size of the Irish economy in 2019 - making it one of the world's largest such hubs.

One of the areas of drivers of growth has been the arcane products, known as collateralised loan obligations (CLOs) vehicles, for repackaged loans of highly...