At its July Plenary meeting in Paris on 18 July, the Financial Stability Board (FSB) approved the initial recommendations for strengthening the oversight and regulation of the shadow banking system prepared by its Shadow Banking Task Force (SBTF).
The initial recommendations for developing a stronger monitoring framework are built on the definition set out in the background note entitled ‘Shadow Banking: Scoping the Issues’, published on 12 April 2011, and include high-level principles for the relevant authorities and a stylised monitoring process.
This process would require authorities to first assess the broad scale and trends of non-bank credit intermediation in the financial system, drawing on information sources such as Flow of Funds and Sector Balance Sheet data, and complemented with other relevant information such as supervisory data. Based on this assessment, authorities will narrow down their focus to non-bank credit intermediation that has the potential to pose systemic risks, by focusing in particular on those involving the four key risk factors identified in the background note:
- Maturity transformation.
- Liquidity transformation.
- Imperfect credit risk transfer.
Monitoring should be sufficiently flexible, forward-looking, regular, and adaptable to capture innovations and mutations in the system that could lead to growing systemic risks as well as to arbitrage that undermines the effectiveness of financial regulation. Authorities should also take into account the structure of financial markets and regulatory frameworks within their jurisdiction. Other factors should also be examined when assessing systemic risk related to shadow banking, such as the inter-connectedness between the shadow banking system and the regular banking system.
The SBTF has conducted a further data and information sharing exercise during the summer as a step toward evaluating and adjusting the proposed framework. This could lay the basis for data collection and assessment by the FSB of global trends and risks in shadow banking from 2012 onwards. The quality of these assessments should improve over time as more data become available through initiatives by FSB member authorities.
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