Progress Report on Transforming Shadow Banking into Resilient Market-Based Financing

1. Transforming Shadow Banking
into Resilient Market-based
Financing
An Overview of Progress and a
Roadmap for 2015

2. What it is..
• Shadow banking, broadly defined as credit intermediation
outside the conventional banking system
• Shadow banking can complement traditional banking by
expanding access to credit or by supporting market liquidity,
maturity transformation, and risk sharing.
• Such intermediation, appropriately conducted, provides a
valuable alternative to bank funding which supports real
economic activity. It is also a welcome source of
diversification of risks to credit supply from the banking
system, and it provides healthy competition for banks.

3. Risks Associated with Shadow Banking:
• As shadow banks do not take deposits, they are subject to less
regulation than traditional banks.
• They can increase the rewards from investments by leveraging
much more than their mainstream counterparts.
• Shadow banks can also cause a build-up of systemic
risk indirectly because they are interrelated with the traditional
banking system.
• As shadow banks use a lot of short-term deposit-like funding
but do not have deposit insurance like mainstream banks, a
loss of confidence can lead to "runs" on these unregulated
institutions.
• Shadow banks collateralised funding is also considered a risk
because it can lead to high levels of financial leverage.

4. Two-pronged strategy to deal with
Problems
A system-wide monitoring framework
• The FSB began conducting annual monitoring exercises to
assess global trends and risks in the shadow banking system
in 2011 and published the results of its exercise.
• These exercises have prompted an increasing number of
national and regional authorities to regularly assess the risks
of shadow banking, so that the monitoring now covers 25
jurisdictions representing 80% of global GDP and 90% of
global financial system assets.

5. Monitoring of Shadow Banking
• MUNFI: The primary focus of the monitoring is a “macro-mapping”
based on balance sheet data of national financial accounts that looks
at all non-bank financial intermediation. This conservative estimate,
referred to as the Monitoring Universe of Non-Bank Financial
Intermediation (MUNFI), ensures that data gathering and
surveillance cover the areas where shadow banking-related risks to
the financial system might potentially arise.
• Narrow Measure: This year’s report also continues to refine the
shadow banking measure by also reporting a narrower measure of
the broad MUNFI estimate, which is constructed by filtering out
non-bank financial activities that have no direct relation to credit
intermediation (e.g. Equity Investment Funds) or that are already
prudentially consolidated into banking groups. As a result, this
narrower measure more accurately reflects the size and composition
of the shadow banking sector.

6. Main findings from the 2014 exercise:
• According to the MUNFI estimate, based on assets of Other
Financial Intermediaries (OFIs), non-bank financial intermediation
grew by $5 trillion in 2013 to reach $75 trillion.
• By absolute size, advanced economies remain the ones with the
largest non-bank financial systems. Globally, MUNFI assets
represent on average about 25% of total financial assets, roughly
half of banking system assets, and 120% of GDP. These patterns
have been relatively stable since 2008.
• Emerging market jurisdictions showed the most rapid increases in
OFIs. Nine emerging market jurisdictions had 2013 growth rates
above 10%.
• Among the MUNFI sub-sectors that showed the most rapid growth
in 2013 are Trust Companies and Other Investment Funds.

7. Strengthening the oversight and regulation of
shadow banking
• Mitigating risks in banks’ interactions with shadow banking
entities
• Reducing the harm of MMFs to “runs”
• Improving transparency and aligning incentives in
securitisation
• Dampening pro-cyclicality and other financial stability risks in
securities financing transactions
• Assessing and mitigating systemic risks posed by other
shadow banking entities and activities

8. Next Steps
• Monitoring of the global trends and risks in the shadow banking
system
• Development of the guidance on the scope of consolidation for bank
prudential regulation:
• Finalisation of the application of numerical haircut floors for non-
centrally cleared SFTs to non-bank-to-non-bank transactions
• Implementation of the regulatory framework for haircuts on non-
centrally cleared SFTs at the international level Finalisation of the
standards and processes for the global securities financing data
collection and aggregation
• Preparation of the findings on the possible harmonisation of
regulatory approaches to re-hypothecation
• Refinement of the information-sharing process for the high-level
policy framework for other shadow banking entities
• Monitoring the implementation of policy recommendations

9. THANK YOU