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29 August 2013

FSB publishes policy recommendations to strengthen oversight and regulation of shadow banking

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:

  1. to mitigate the spill-over effect between the regular banking system and the shadow banking system;
  2. to reduce the susceptibility of money market funds (MMFs) to "runs";
  3. to assess and align the incentives associated with securitisation;
  4. 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
  5. 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. 4 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. 5 above).

As far as other shadow banking policy areas are concerned, the Basel Committee on Banking Supervision will complete its work in area 1 above in 2014, and the International Organisation of Securities Commissions has already set out final policy recommendations for areas 2 and 3 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.

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”.

Press release

© Financial Stability Board

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