The Financial Stability Board (FSB) has published policy recommendations to
strengthen the oversight and regulation of the shadow banking system following
consultation in November 2012. The “shadow banking system” can broadly be
described as “credit intermediation involving entities and activities (fully or
partially) outside the regular banking system” or non-bank credit
intermediation in short.
The FSB 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 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 comprise:
• An Overview of Policy Recommendations - this sets out the FSB’s overall approach to addressing financial stability concerns associated with shadow banking, actions
taken to date, and next steps.
• Policy Framework for Addressing Shadow Banking Risks in Securities
Lending and Repos - this sets out recommendations for addressing financial stability risks in this area, including enhanced transparency, regulation of securities financing, and improvements to market structure. 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.
Annex 1 contains the recommendations:
- Recommendations 1- 3 call for authorities to collect more granular data on this area with urgency. This includes trade level flow data for repo trades and outstanding balances for both repo trades and securities lending. Existing data collection opportunities
and the use of trade repositories or regulatory reporting are to be considered. National and regional data should then be aggregated by the FSB on a monthly basis. Annex 4 sets out the different approaches that can be applied to data collection to implement
this recommendation and the current initiatives that call for a trade repository are detailed.
- Recommendation 4 calls for the Enhanced Disclosure Task Force to work to improve public disclosure of financial institutions’ securities lending, repo and wider collateral management activities.
- Recommendation 5 calls on national authorities to review the reporting requirements for fund managers to end-investors against the FSB’s proposals.
• Policy Framework for Strengthening Oversight and Regulation of Shadow
Banking Entities - this sets out the high-level policy framework to assess and address risks posed by shadow banking entities other than money market funds. This sets high level overarching principles that authorities should refer.
- Principles 2 – 4 call for authorities to collect information needed to assess the extent of the risks posed by shadow banking, enhance disclosure by shadow banking entities and regulatory assess their non-bank financial entities to identify whether their
activities pose systemic risk. The sharing of information with other authorities is seen as key to minimise any gaps.
The policy measures above have now been finalised (with the exception of the
consultative proposals on calculation of haircuts (see below) and will be
adopted by FSB members in an internationally coordinated manner. The FSB,
in coordination with the relevant standard-setting bodies, will now monitor the
implementation of the finalised policy recommendations. The FSB will
report on progress to the G20 in November 2014.
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 consultative
proposals are 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.
Overview of policy recommendations
Policy Framework for securities lending and repos