Appropriate monitoring and regulatory frameworks for the shadow banking system needs to be in place to mitigate the build-up of risks.
On November 18, 2012, the Financial Stability Board (FSB) published for public consultation an initial integrated set of policy recommendations intended to strengthen oversight and regulation of shadow banking. Given the FSB's finding that the shadow banking system grew to a new high of $67 trillion globally last year, it is understandable that regulators and policy-makers, including those among the FSB's membership, fear that shadow banking activities harbor serious and sometimes hidden risks to the global financial system. The FSB's November 18 release calls for greater controls on this area of the financial world that has thus far escaped explicit regulation. The consultation paper is timely given the European Commission is poised to propose EU-wide shadow banking rules in 2013, and the US Treasury Department has recently proposed structural changes to money market funds, considered a key part of the shadow banking system, to combat the perceived systematic risks posed by them.