Tracking New Zealand's quiet rise in shadow banking
New Zealand’s shadow banking sector remains small but growing, raising the need for closer monitoring as credit activity shifts beyond traditional banks.
What is shadow banking?
Shadow banking refers to credit intermediation activities carried out outside the regulated banking system.
According to international definitions, shadow banks perform similar functions to traditional banks but operate without the same regulatory oversight.
On the positive side, “shadow banks increase overall credit availability, providing more sources of liquidity, thereby supporting economic growth and diversifying risk across the financial system,” interest.co.nz reported.
However, the downside is that “they are not subject to the same risk controls required by bank regulators because they do not take in deposits,” and lack government backstops designed to maintain financial market stability.
How shadow banking works in New Zealand
In New Zealand, some non-bank financial institutions are registered with authorities like the Companies Office, Financial Markets Authority, or the Reserve Bank, which recently highlighted its goal to boost competition before the Finance and Expenditure Committee.
However, “they are not subject to the same intensive scrutiny by the RBNZ as registered banks,” according to interest.co.nz.
Non-bank lenders often partner with regulated banks, but they can assume higher risk levels because they are not bound by the same capital, leverage, or liquidity requirements introduced after the global financial crisis.
The global shadow banking sector has been expanding, driven by stricter regulations for traditional banks and investors’ search for yield in a low-interest-rate environment.
New Zealand mirrors this trend, with increased appetite for innovative, tech-based financial products.
An inventory of New Zealand’s shadow banking assets
A compiled inventory of New Zealand’s shadow banking sector estimates total assets at $11.1 billion as of late 2016. Here’s a breakdown:
Mortgage lending sector
- Nelson Building Society: $558.7 million
- First Mortgage Trust: $353.8m
- Wairarapa Building Society: $139.2m
Total for mortgage lending: Z$1.05bn
Asset lending sector
- UDC Finance: $2.665bn
- Toyota Finance: $1.069 bn
- Motor Trade Finance: $596.5m
- Mercedes Benz Finance: $567m
- BMW Finance: $358.2m
Total for asset lending: $8.42bn
Personal lending and peer-to-peer lending
- NZCU Baywide: $293.6m
- First Credit Union: $334.4m
- FlexiGroup: $786.2m
Total for personal lending: $1.66bn
Peer-to-peer lending platforms like Harmoney, Squirrel Money, Lending Crowd, and LendMe contribute additional but unspecified figures, interest.co.nz reported.
Is shadow banking a threat to New Zealand’s financial stability?
Despite its growth, New Zealand’s shadow banking sector remains small compared to the formal banking system.
As of the end of 2016, regulated banks in New Zealand reported total assets of $510.3bn, more than 45 times larger than the assets identified in the shadow banking sector.
“It is pretty clear that the shadow banking sector in New Zealand does not dominate our formal banking system, nor is it large enough to pose a financial stability threat,” interest.co.nz said.
Why monitoring shadow banking remains important
While the current size of New Zealand’s shadow banking system does not pose systemic risks, gaps in data mean the full extent of exposure is not completely known.
The sector’s expansion warrants careful monitoring, especially as financial innovation and investor appetite for higher returns continue to evolve, interest.co.nz said.
