Shadow banking can be broadly described as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system” or non-bank credit intermediation in short. Whilst such intermediation can support the real economy there is also a view that large scale non-bank entities and transactions can operate in ways that create bank-like risks to financial stability.
A key aspect of the Financial Stability Board’s (FSB) work is to ensure that shadow banking is subject to appropriate oversight and regulation to address bank-like risks to financial stability emerging outside the regular banking system while not inhibiting sustainable non-bank financing models that do not pose such risks.
Regulatory framework for haircuts on non-centrally cleared securities financing transactions
The FSB has now published a Regulatory framework for haircuts on non-centrally cleared securities financing transactions (the Framework). The Framework is an important part of the FSB’s policy recommendations to address shadow banking risks in relation to securities financing transactions. The Framework is intended to limit the build-up of excessive leverage outside the banking system, and to help reduce procyclicality of that leverage. The Framework comprises of two complementary elements:
- qualitative standards to be incorporated into existing or new regulatory standards for methodologies used by market participants that provide securities financing to calculate haircuts on the collateral received (including additional guidance for methodologies used by market participants to calculate margins on a portfolio basis); and
- a framework of numerical haircut floors that will apply to non-centrally cleared securities financing transactions in which financing against collateral other than government securities is provided to non-banks. Centrally-cleared securities financing transactions and financing provided to banks and broker-dealers subject to adequate capital and liquidity regulation on a consolidated basis are excluded.
Annex 4 of the Framework contains a consultative proposal. The FSB has decided to raise the levels of numerical haircut floors, existing market and central bank haircuts, and data on historical price volatility of different asset classes. The FSB has also decided to propose applying the numerical haircut floors to non-bank-to-non-bank transactions so as to ensure that shadow banking activities are fully covered, to reduce the risk of regulatory arbitrage, and to maintain a level playing field. The deadline for comments is 15 December 2014.
Procyclicality of haircuts: Evidence from QIS1
The FSB has also published a background document entitled Procyclicality of haircuts: Evidence from QIS1. This document examines the procyclicality of haircuts on non-centrally cleared securities financing transactions and their role during the global financial crisis based on the first stage QIS (QIS1) data.
View FSB publishes regulatory framework for haircuts on non-centrally cleared securities financing transactions, 14 October 2014