Many large banks in the world's advanced economies still aren't strong enough to adequately fund the economic recovery from the 2008 financial crisis and shadow banking is helping fill the void, the International Monetary Fund (IMF) said Wednesday.

The IMF report was released one day after another IMF study said that China may have overtaken the US as the world's largest economy based on purchasing power, according to the Financial Times.

As for banks, the IMF said in its Global Financial Stability Report (GFSR) that they "hold significantly more capital than before the crisis, but many institutions do not have a sustainable business model that can support the recovery."

The report analyzed 300 large banks in advanced economies and found banks representing almost 40 percent of total assets aren't strong enough to supply adequate credit to support the recovery. In the euro area, the proportion is about 70 percent.

"Financial stability risks are shifting from the banking system to less-regulated shadow banks," said the report.

In China, shadow banking now accounts for about 35 percent of gross domestic product (GDP), the GFSR said. Shadow banking is generally defined as financial institutions that make loans and do other bank-type activities, but they are not regulated like a traditional bank, said David Dollar, senior fellow at the John L. Thornton China Center at the Brookings Institution, a Washington think tank.

"China's shadow banking sector is actually small compared to developed economies," Dollar said Wednesday in an interview with China Daly . "But it is large as far as other developing economies. The question is do you consider China a developing economy or is it now an advanced economy?"

Shadow banking has been growing rapidly in China. "China has tight regulation of its banking system. Shadow banking represents an effort to get around that," noted Dollar. He said in recent years Chinese regulators have been trying to slow down the economy and this has opened the door for others to provide financing.

There is a good side to shadow banking, said Dollar. It allows big investors to generate higher returns – albeit with higher risk, while providing financing to businesses that can't get funding or enough funding from a traditional bank by paying higher interest rates.

"The problem with shadow banking is that it can grow too big and too fast," said Dollar. "We saw that in the US in the 2008 financial crisis."

The World Bank on Monday also cited China's effort to limit shadow banking when it slightly lowered growth forecasts for the country's economy to 7.4 percent this year and 7.2 percent next year, compared with its previous forecast of 7.6 percent and 7.5 percent.

On China surpassing the US as the world's biggest economy based on purchasing power, the FT on Tuesday cited figures in the the IMF's World Economic Outlook. The newspaper said that this year China's purchasing-power adjusted GDP will total $17.6 trillion while the US will come in at $17.4 trillion. That GDP calculation features purchasing power parity or PPP, which utilizes exchange rates that adjust for price differences of the same goods between nations.

However, in terms of traditional GDP, which is generally defined as the total value of all goods and services produced over a specific time period in a country, the US remains far ahead of China. Based on this measurement, US GDP in 2013 was nearly $16.8 trillion while China had GDP of $9.24 trillion according to the World Bank.

paulwelitzkin@chinadailyusa.com

China's economy surpasses US