Transforming Shadow Banking

into Resilient Market-based

Financing

An Overview of Progress and a

Roadmap for 2015

What it is..

• Shadow banking, broadly defined as credit intermediation

outside the conventional banking system

• Shadow banking can complement traditional banking by

expanding access to credit or by supporting market liquidity,

maturity transformation, and risk sharing.

• Such intermediation, appropriately conducted, provides a

valuable alternative to bank funding which supports real

economic activity. It is also a welcome source of

diversification of risks to credit supply from the banking

system, and it provides healthy competition for banks.

Risks Associated with Shadow Banking:

• As shadow banks do not take deposits, they are subject to less

regulation than traditional banks.

• They can increase the rewards from investments by leveraging

much more than their mainstream counterparts.

• Shadow banks can also cause a build-up of systemic

risk indirectly because they are interrelated with the traditional

banking system.

• As shadow banks use a lot of short-term deposit-like funding

but do not have deposit insurance like mainstream banks, a

loss of confidence can lead to "runs" on these unregulated

institutions.

• Shadow banks collateralised funding is also considered a risk

because it can lead to high levels of financial leverage.

Two-pronged strategy to deal with ProblemsA system-wide monitoring framework

• The FSB began conducting annual monitoring exercises to

assess global trends and risks in the shadow banking system

in 2011 and published the results of its exercise.

• These exercises have prompted an increasing number of

national and regional authorities to regularly assess the risks

of shadow banking, so that the monitoring now covers 25

jurisdictions representing 80% of global GDP and 90% of

global financial system assets.

Monitoring of Shadow Banking

• MUNFI: The primary focus of the monitoring is a “macro-mapping” based on balance sheet data of national financial accounts that looks at all non-bank financial intermediation. This conservative estimate, referred to as the Monitoring Universe of Non-Bank Financial Intermediation (MUNFI), ensures that data gathering and surveillance cover the areas where shadow banking-related risks to the financial system might potentially arise.

• Narrow Measure: This year’s report also continues to refine the shadow banking measure by also reporting a narrower measure of the broad MUNFI estimate, which is constructed by filtering out non-bank financial activities that have no direct relation to credit intermediation (e.g. Equity Investment Funds) or that are already prudentially consolidated into banking groups. As a result, this narrower measure more accurately reflects the size and composition of the shadow banking sector.

Main findings from the 2014 exercise:

• According to the MUNFI estimate, based on assets of Other

Financial Intermediaries (OFIs), non-bank financial intermediation

grew by $5 trillion in 2013 to reach $75 trillion.

• By absolute size, advanced economies remain the ones with the

largest non-bank financial systems. Globally, MUNFI assets

represent on average about 25% of total financial assets, roughly

half of banking system assets, and 120% of GDP. These patterns

have been relatively stable since 2008.

• Emerging market jurisdictions showed the most rapid increases in

OFIs. Nine emerging market jurisdictions had 2013 growth rates

above 10%.

• Among the MUNFI sub-sectors that showed the most rapid growth

in 2013 are Trust Companies and Other Investment Funds.

Strengthening the oversight and regulation of shadow banking

• Mitigating risks in banks’ interactions with shadow banking

entities

• Reducing the harm of MMFs to “runs”

• Improving transparency and aligning incentives in

securitisation

• Dampening pro-cyclicality and other financial stability risks in

securities financing transactions

• Assessing and mitigating systemic risks posed by other

shadow banking entities and activities

Next Steps• Monitoring of the global trends and risks in the shadow banking

system

• Development of the guidance on the scope of consolidation for bank prudential regulation:

• Finalisation of the application of numerical haircut floors for non-centrally cleared SFTs to non-bank-to-non-bank transactions

• Implementation of the regulatory framework for haircuts on non-centrally cleared SFTs at the international level Finalisation of the standards and processes for the global securities financing data collection and aggregation

• Preparation of the findings on the possible harmonisation of regulatory approaches to re-hypothecation

• Refinement of the information-sharing process for the high-level policy framework for other shadow banking entities

• Monitoring the implementation of policy recommendations

THANK YOU