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.

The FSB Workstream on Securities Lending and Repos ("Workstream") under the FSB Shadow Banking Task Force has published an interim report on its findings and progress. The mission of the Workstream is to present, by the end of 2012, policy recommendations to strengthen regulation of securities lending and repos within the context of the shadow banking system.  In order to inform its decision on proposed policy recommendations, the Workstream has reviewed current market practices through discussions with market participants,  and existing regulatory frameworks through a survey of regulatory authorities.  This interim report identifies a number of issues that might pose risks to financial stability, and these financial stability issues will form the basis for the next stage of its work in developing appropriate policy measures to address risks where necessary.