The Financial Stability Board (FSB) has adopted a two-pronged strategy to transform shadow banking into resilient market-based finance. First, it has created a system-wide monitoring framework to track financial sector developments outside the banking system with a view to identifying the build-up of systemic risks and initiating corrective actions where necessary. Second, it is coordinating and contributing to the development of policy measures in a number of areas where oversight and regulation need to be strengthened to reduce excessive build-up of leverage, as well as maturity and liquidity mis-match, in the system.

One such area is assessing and mitigating systemic risks posed by non-bank financial entities and activities other than money market funds. The FSB developed a high-level policy framework in this area in August 2013 and its implementation formed part of the G20 Roadmap agreed at the 2013 St Petersburg Summit. The policy framework sets out key overarching principles that authorities should adhere to in their oversight of non-bank financial entities that are identified as posing shadow banking risks that threaten financial stability. The principles call on authorities to:

  • have the ability to define, and keep up-to-date, the regulatory perimeter if necessary to ensure financial stability;
  • collect information needed to assess shadow banking risks for entities identified as having the potential to pose risks to the financial system;
  • enhance disclosure of shadow banking entities’ risks; and
  • assess shadow banking entities based on economic functions and apply policy tools if necessary to mitigate identified financial stability risks.

The FSB has now published a thematic peer review report on the implementation of its policy framework for shadow banking entities.

The objective of the peer review was to evaluate the progress made by FSB jurisdictions in implementing the FSB’s policy framework. In particular, the review evaluated jurisdictions’ adherence to the overarching principles set out in the policy framework, including their efforts to assess these entities based on economic functions and participate in the FSB information-sharing exercise.

The peer review concludes that implementation of the policy framework remains at a relatively early stage and that more work is needed to ensure that jurisdictions can comprehensively assess and respond to potential shadow banking risks.

The peer review sets out a number of recommendations including those that FSB jurisdictions should:

  • establish a systematic process involving all relevant domestic authorities to assess the shadow banking risks posed by non-bank financial entities or activities, and ensure that any entities or activities that could pose material risks to financial stability are brought within the regulatory perimeter in a timely manner;
  • address identified gaps in the availability of data, including by having sufficient information-collection powers, to assess financial stability risks posed by non-bank financial entities or activities, taking into account the potential materiality of those risks;
  • remove impediments to cooperation and information-sharing between authorities, including on a cross-border basis in order to: (i) monitor and assess shadow banking risks arising from non-bank financial entities or activities; (ii) support the application of appropriate policy tools where necessary to mitigate financial stability risks; and (iii) participate effectively in the FSB information-sharing exercise; and
  • review the extent to which existing public disclosures by non-bank financial entities are adequate to help market participants understand the shadow banking risks posed by such entities, and enhance those disclosures as necessary to address identified material gaps.

The FSB will continue to monitor jurisdictions’ implementation of the policy framework, which will take place through the annual information-sharing exercise.

View FSB thematic peer review report on implementation of policy framework for shadow banking, 25 May 2016