Why the shadow banking sector is keeping Canada's financial regulators up at night
Canada’s top banking regulator has sat down with senior managers at the country’s largest financial institutions to scrutinize their exposure to private lending and alternative credit strategies tied to the fast-growing shadow banking sector.
A senior financial source who wasn’t authorized to speak about the meetings said regulatory concerns of a potential blow-up in the space were amplified recently by the failures of Silicon Valley Bank and Signature Bank in the United States and a growing chorus of voices warning about weakness in the commercial real estate sector.
The lightly regulated and unregulated lenders that employ alternative credit strategies include private equity, investment funds and hedge funds, and are now formally referred to by Canadian authorities including the Bank of Canada as “non-bank financial intermediaries.” Mortgage finance companies and mortgage investment corporations (MICs) are part of this classification, too.
The sector has been growing quickly, with players taking on many of the financial functions traditionally done by deposit-taking banks, such as direct lending to corporations and individuals as well as private securitizations, which involve collateralizing pools of consumer and business loans into marketable asset‑backed securities. There are some large players in the mix such as Blackstone Inc. and Brookfield Corp., but many smaller players as well.
The Bank of Canada hasn’t taken an in-depth look at the sector since 2020, when the central bank found it had already grown to $1.71 trillion by the end of 2019, up 17 per cent over two years. Globally, shadow banking has grown to exceed the share taken by traditional banking, though Canada’s large regulated financial institutions appear
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