The Financial Stability Board (FSB) has published a report that assesses shadow banking activities, risks and the adequacy of post-crisis policy tools to address financial stability concerns.
Key messages in the report include:
- aspects of the shadow banking activities generally considered to have made the financial system most vulnerable and that contributed to the financial crisis have declined significantly and are generally no longer considered to pose financial stability risks;
- since the financial crisis, policies have been introduced at the international level, and both regulatory reforms and new policy tools have been introduced at national/regional levels to address financial stability risks from shadow banking that have materialised to date;
- authorities are establishing system-wide oversight and monitoring frameworks to assess the financial stability risks from shadow banking, so that appropriate policy measures can be taken;
- authorities have taken steps to address banks’ involvement in shadow banking;
- authorities have acted to reduce liquidity and maturity mismatches, and also leverage in the shadow banking system;
- alongside increases in capitalisation of banks’ securitisation related exposures, national and regional reforms have been undertaken to address incentive problems and opaqueness associated with securitisation;
- while some of the more vulnerable aspects of shadow banking have shrunk from pre-crisis levels, others have grown or remain relatively large;
- shadow banking is less leveraged than before, thereby reducing the overall financial stability risks posed. However, the size and considerable growth of collective investment vehicles, where accompanied by significant liquidity transformation, could prove disruptive in market stress; and
- at present the FSB has not identified other new financial stability risks from shadow banking that would warrant additional regulatory action at the global level. However, new variations of shadow banking activities are likely to develop in the future.
To address residual gaps and further enhance oversight, FSB member authorities have agreed on the following recommendations going forward:
- enhance system-wide oversight of shadow banking and policy responses to address the identified risks through implementing the recommendations of the 2015-16 peer review;
- strengthen the monitoring of shadow banking activity and the data collection framework; and
- complete the remaining policy development at the international level and implement the agreed policy recommendations to reduce risks and arbitrage opportunities across jurisdictions and sectors.
Mark Carney, Chair of the FSB, said “This assessment confirms the extent of the transformation of shadow banking into resilient market-based finance. It concludes that the agreed policies, once fully and effectively implemented, will be adequate to address existing risks. Of course, since shadow banking activities will inevitably evolve over time, FSB member authorities will strengthen surveillance to support ongoing risk assessments and guide any future regulatory response”.