Thursday, May 26, 2016
Author: David Schwartz J.D. CPA
According to a peer review published the by Financial Stability Board (FSB) on May 25, 2016, regulation of shadow banking remains at an early stage, and much progress remains to be made. According to the report, notwithstanding the progress made, “more work is needed to ensure that jurisdictions can comprehensively assess and respond to potential shadow banking risks posed by non-bank financial entities, and support FSB risk assessments and policy discussion.”
The FSB defines “shadow banking system” broadly as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system,” or non-bank credit intermediation in short. Appropriately conducted, non-bank credit intermediation provides a valuable alternative to bank funding that supports real economic activity. But experience from the crisis demonstrates the capacity for some non-bank entities and activities to give rise to bank-like risks to financial stability (longer-term credit extension based on short-term funding and leverage). To address these risks, and to build more sustainable sources of non-bank financing for the real economy, the FSB has been working on transforming shadow banking into resilient market-based finance as a core element of regulatory reforms. The purpose of the May 25, 2016 peer review was to assess the progress made by FSB member jurisdictions in implementing the regulatory principles set forth in the FSB’s August 29, 2013 Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities (“Policy Framework”), which is a key component of the FSB’s efforts in this area.
The peer review revealed a number of interesting findings about the state of shadow banking regulatory reform, highlighting both successes and weaknesses:
The peer review encourages FSB jurisdictions to continue efforts to implement the Policy Framework, and makes a number of recommendations and suggestions:
The peer review indicates that the FSB still considers shadow banking to be an avenue of considerable risk to the global financial system. The authors said that, going forward, the FSB will conduct follow-up work to: enhance consistency across jurisdictions in their classification of non-bank financial entities into economic functions; develop approaches to help jurisdictions better monitor and assess risks from those entities’ interconnectedness and cross-border activities; and facilitate the sharing of information among member authorities on policy tools and public disclosures. The FSB expects to issue further peer reviews to update progress on implementation of the Policy Framework.