Wednesday, September 24, 2014

Shadow Banking Remains on the FSB Agenda

The FSB Has a New Shadow Banking Roadmap in Store for Brisbane in November

Following its September meeting in Cairns, the Financial Stability Board (FSB) has published a press release highlighting some of the vulnerability the FSB still sees as threatening the global financial system.  The release also lays out some work plans for some of the FSB’s ongoing core financial reform efforts, including the area of shadow banking.  


Though noting improvements in the strength and stability of the core financial system, the FSB has some concerns about some areas of the system that still remain vulnerable.  For example, they commented that, despite the reduction of leverage in the banking system, leverage in other parts of the financial system, like the corporate debt markets, has increased.  

The FSB reported progress in work in several areas they have previously identified as potential vulnerabilities.  



  • Ending Too-Big-To-Fail.  
  • Shadow Banking.
  • Derivatives Markets.
  • Forex Benchmark Reform.
  • Accounting and Auditing Disclosure.  




With regard to it’s work in the shadow banking area, the FSB announced that it will present an updated roadmap in time for the Brisbane Summit. In addition, they:




  • approved its fourth annual global shadow banking monitoring report based on end-2013 data.
  • approved a revised regulatory framework on haircuts for non-centrally cleared securities financing transactions to limit the build-up of excessive leverage outside the banking system and help reduce procyclicality.
  • agreed a consultative proposal on the application of numerical haircut floors to non-bank-to-non-bank transactions.
  • reviewed standards and process for global securities financing data collection and aggregation, which will be published for public consultation before the Brisbane Summit.
  • approved a work plan to examine possible harmonization of regulatory approaches to re-hypothecation of client assets and possible financial stability issues related to collateral re-use.


The FSB also took note of the preliminary results of an initial information-sharing exercise among jurisdictions on their application of the FSB's high-level policy framework for shadow banking entities. The FSB announced that they will launch a peer review on the national implementation of the high-level policy framework in 2015.

Shadow banking remains a work in progress for the FSB, and a subject of close monitoring.  This area remains complex mainly because of cross-border implications and regulatory arbitrage.  For this reason, the board has focused to a great extent encouraging the the harmonization of reforms of various jurisdictions through "substituted compliance."  FSB members are cognizant that shadow banking transactions and derivatives had a large hand in the financial crisis.  Overall, their approach to reforms, and shadow banking in particular, has been to "make sure that those who participate in the financial system have trust and confidence in the financial system and it doesn't bring unexpected systemic risk. And that comes down to making sure, again, that things are transparent and can be monitored globally." (source)