The Financial Stability Board (FSB) has launched a peer review on the implementation of its policy framework for financial stability risks posed by non-bank financial entities other than money market funds (“other shadow banking entities”). The objective of the review is to evaluate the progress made by FSB jurisdictions in implementing the overarching principles set out in the framework – in particular, to assess shadow banking entities based on economic functions, to adopt policy tools if necessary to mitigate any identified financial stability risks, and to participate in the FSB information-sharing process. However, DFA’s initial take is that the proposed approach is relatively light-handed, and may not be sufficient. You can read our analysis of shadow banking and why it should be better regulated here.
The summarized terms of reference provide more details on the objectives, scope and process of this review. A questionnaire to collect information from national authorities has been distributed to FSB members. The responses will be analysed and discussed by the FSB later this year. The peer review report will be published in early 2016.
As part of this peer review, the FSB invites feedback from financial institutions, industry and consumer associations as well as other stakeholders on the areas covered by the peer review. This could include comments on:
- institutional arrangements needed to define and update the regulatory perimeter to capture new forms of shadow banking if necessary to ensure financial stability;
- types of information that may be necessary to assess shadow banking risks for entities identified as having the potential to pose risks to the financial system;
- possible ways to enhance public disclosure of shadow bank entities’ risks; and
- the design of policy tools to mitigate identified financial stability risks.
Feedback should be submitted by 24 July 2015. Individual submissions will not be made public.
Transforming shadow banking into resilient market-based finance is one of the core elements of the FSB’s regulatory reform agenda to address the fault lines that contributed to the global financial crisis and to build safer, more sustainable sources of financing for the real economy. The FSB has adopted a two-pronged strategy to deal with these fault lines. 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 five areas where oversight and regulation need to be strengthened to reduce excessive build-up of leverage, as well as maturity and liquidity mismatch, in the system.
One of these five areas is assessing and mitigating financial stability risks posed by non-bank financial entities other than money market funds (“other shadow banking entities”). Based on the G20 Roadmap agreed at the St Petersburg Summit, the FSB developed a high-level policy framework for other shadow banking entities in August 2013. The framework focuses on the underlying economic functions (i.e. activities) of non-bank financial entities instead of their legal forms, and sets forth 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.
