The Financial Stability Board (FSB) is publishing today policy recommendations to strengthen the oversight and regulation of the shadow banking system. These recommendations take into account public responses received on the consultative documents issued on 18 November 2012.
The FSB has focused on five specific areas in which policies are needed to mitigate the potential systemic risks associated with shadow banking:
(i) to mitigate the spill-over effect between the regular banking system and the shadow banking system;
(ii) to reduce the susceptibility of money market funds (MMFs) to "runs";
(iii) to assess and align the incentives associated with securitisation;
(iv) to dampen risks and pro-cyclical incentives associated with securities financing transactions such as repos and securities lending that may exacerbate funding strains in times of market stress; and
(v) to assess and mitigate systemic risks posed by other shadow banking entities and activities.
The documents published today comprise:
- a report entitled An Overview of Policy Recommendations that sets out the FSB's overall approach to addressing financial stability concerns associated with shadow banking, actions taken to date, and next steps.
- a report entitled Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos that sets out recommendations for addressing financial stability risks in this area, including enhanced transparency, regulation of securities financing, and improvements to market structure (ref. (iv) above). It also includes consultative proposals on minimum standards for methodologies to calculate haircuts on non-centrally cleared securities financing transactions and a framework of numerical haircut floors.
- a report entitled Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities that sets out the high-level policy framework to assess and address risks posed by shadow banking entities other than MMFs (ref. (v) above).
As far as other shadow banking policy areas are concerned, the Basel Committee on Banking Supervision will complete its work in area (i) above in 2014, and the International Organization of Securities Commissions has already set out final policy recommendations for areas (ii) and (iii) above in its reports Policy Recommendations for Money Market Funds and Global Developments in Securitisation Markets.
Most of the policy measures on shadow banking developed by the FSB have now been finalised and will be adopted by FSB members in an internationally coordinated manner. However, the proposed minimum standards for methodologies to calculate haircuts on non-centrally cleared securities financing transactions and a framework of numerical haircut floors, will be defined in light of further assessments of their potential impact on the financial system. The FSB welcomes comments on the consultative proposals set out in Annex 2 of the Policy Recommendations to Address Shadow Banking Risks in Securities Lending and Repos. Comments should be submitted by 28 November 2013 by email to fsb@bis.org or post (Secretariat of the Financial Stability Board, c/o Bank for International Settlements, CH-4002, Basel, Switzerland). All comments will be published on the FSB website unless a commenter specifically requests confidential treatment.
The FSB, in coordination with the relevant standard-setting bodies, will monitor the implementation of the finalised policy recommendations on shadow banking. The FSB will also continue to review the progress of the remaining work to develop policy recommendations and report on progress to the G20 in November 2014.
Mark Carney, Chairman of the FSB, stated that "The policy recommendations issued by the FSB today address important sources of maturity transformation and leverage in shadow banking. Implementation of these recommendations will be an essential first step towards achieving our aim of transforming shadow banking into market-based financing conducted on a sound basis. This, in turn, will help diversify the sources of financing of our economies in a sustainable way and contribute to the G20's ultimate objective of strong, sustainable and balanced growth".
Daniel Tarullo, Chairman of the FSB Standing Committee on Supervisory and Regulatory Cooperation stated that "The policy framework for strengthening oversight and regulation of shadow banking entities will help authorities to better identify and address financial stability risks from shadow banking. This is especially important as tighter regulations on banks and other traditional market participants that are coming into effect may incentivise some risky activities to move to less tightly regulated sectors".