June 13, 2013 / 2:43 PM / in 4 years

Bank of Canada says some shadow banking areas need monitoring

A sign framed by maple leaves is pictured in front of the Bank of Canada building in Ottawa July 17, 2012.Chris Wattie

OTTAWA (Reuters) - Some areas in Canada's shadow banking sector warrant focused monitoring, the Bank of Canada said on Thursday, though it said domestic shadow banking was relatively small and was conservative in its composition.

Former Bank of Canada Governor Mark Carney had warned that as regulations tighten in the wake of the 2007-09 financial crisis, some activities would shift to often less-regulated shadow banking, which includes hedge funds, private capital and venture funds.

A report in the central bank's semi-annual Financial System Review said Canada's shadow banking was smaller relative to traditional banking and the economy than its U.S. counterpart.

It also said a large portion of activities were conducted by or involved regulated entities and were backed by explicit government guarantees.

Among the areas it said needed extra monitoring are:

- the strong growth in the securitization of insured mortgages by specialized mortgage lenders

- the increased use of repos by some pension funds

- the funding of longer-term assets such as residential mortgages with the issuance of short-term asset-backed commercial paper.

A separate study released by the bank said the increased demand for collateral globally and in Canada due to financial reforms was manageable.

Reporting by Randall Palmer; editing by Louise Egan

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