Shadow banking is non-bank credit intermediation involving bank-like activities, such as maturity/liquidity transformation and/or leverage, that can become a source of systemic risk. This risk can be compounded where non-bank activities have links to the banking system.

Non-bank finance provides a valuable alternative to bank funding and helps to support real economic activity. It is also a welcome source of diversification from credit supply provided by banks.

The FSB’s work on shadow banking follows a two-pronged strategy:

  • Monitoring – an annual system-wide monitoring exercise to assess global trends and risks of shadow banking; and
  • Policymaking – developing a range of policy recommendations to address the financial stability risks from shadow banking highlighted by the crisis.

The objective of the FSB’s work is to ensure that shadow banking is subject to appropriate oversight and regulation to address bank-like risks to financial stability emerging outside of the regular banking system while not inhibiting sustainable non-bank financing models that do not pose such risks. The approach is designed to be proportionate to financial stability risks, focusing on those activities that are material to the system, using as a starting point those that were a source of problems during the crisis.

Monitoring

Since 2011, the FSB has undertaken an annual monitoring exercise to assess global trends and risks in the shadow banking system. The monitoring exercise starts with by casting the net wide to take a view of assets across the whole financial sector and then focuses on a narrow measure of financial activities, those that could pose a risk to the financial system and therefore pose shadow banking risks (e.g. maturity/liquidity transformation, leverage). To arrive at the narrow measure, non-bank financial entities are classified into five economic functions, each of which involves non-bank credit intermediation that may pose shadow banking risks. This allows for a more accurate refinement of the narrow measure through exclusion of non-bank financial entities that do not fall into the economic functions and therefore are unlikely to pose a financial stability risk.

The narrow measure assesses risk before policy measures and risk management tools are applied. This allows authorities to separately assess the effectiveness of existing policy tools to address financial stability risks that may arise from shadow banking and identify any residual risks that may warrant policy responses.

Monitoring aggregates Composition of shadow banking

The latest Global Shadow Banking Report was published in May 2017 and found that the narrow measure of shadowing banking activities – those that may give rise to financial stability risks – grew by an exchange rate-adjusted 3.2% to $34 trillion at end-2015. Within the narrow measure, collective investment vehicles with features that make them susceptible to runs represented 65%, growing by around 10% over the past four years. Loan provision that is dependent on short-term funding or secured funding of client assets represented 8% of the narrow measure, growing by 2.5% in 2015. There was a decline in activities that are dependent on short-term funding or secured funding of clients assets (-2.8%), facilitation of credit creation (-0.1%) and securitisation-based credit intermediation (-2.7%). 

Policymaking

At the November 2010 Seoul Summit, the G20 Leaders asked the FSB to develop recommendations to strengthen the oversight and regulation of shadow banking activities. The FSB has been coordinating and contributing to the development of policies in five areas where oversight and regulation needs to be strengthened to mitigate the potential systemic risks associated with shadow banking, namely:

  1. mitigating the spill-over effect between the regular banking system and the shadow banking system;
  2. reducing the susceptibility of money market funds (MMFs) to “runs”;
  3. improving transparency and aligning incentives associated with securitisation;
  4. dampening pro-cyclicality and other financial stability risks associated with securities financing transactions such as repos and securities lending; and
  5. assessing and mitigating systemic risks posed by other shadow banking entities and activities.

When implemented, this integrated set of policies should mitigate financial stability risks emanating from shadow banking and help to transform it into resilient market-based financing that will support sustainable economic growth.

The FSB has not identified new shadow banking risks that currently require additional regulatory action at global level. However, given that new forms of shadow banking activities are certain to develop in the future, FSB member authorities must maintain and continue to invest in an effective and ongoing programme of surveillance, data sharing and analysis so as to support judgements on any required regulatory response in the future.