FSA has published a set of documents on shadow banking:

  • Global Shadow Banking Monitoring Report: This report uses Flow of Funds and Sector Balance Sheet data as of the end of 2011 and covers 25 jurisdictions. It finds that the shadow banking sector has surpassed its pre-crisis peak, although growing at a slower pace than before. The report looks more specifically into finance companies, concluding that, because of its limited size, the sector does not pose significant systemic risks.
  • Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities: This document corresponds to the workstream on “other” shadow banking entities, focussed on designing analytical tools to capture innovations at the boundary of bank regulation. Given the diversity in business models across sectors and within the same type of entity, FSB proposes an economic function-based perspective to identifying the sources of shadow banking risks. Authorities should apply policy tools to collect information and bring those activities within their perimeter.
  • Policy Recommendations to Address Shadow Banking Risks in Securities Lending and Repo: This document consults on a number of recommendations based on:
    • collecting more granular data and encouraging the establishment of trade repositories to help with this;
    • introducing minimum standards for the calculation of collateral value and haircuts, but with floors to these haircuts where there is risk of procyclicality;
    • regulating cash collateral reinvestment;
    • disclosure of rehypothecation to investors and prohibiting it when the purpose is the financing of own-account activities of the intermediary; an
    • evaluating proposals to introduce central counterparties (CCPs) for the securities lending and repo markets.
  • An Integrated Overview of Policy Recommendations: This document considers the other three documents in the context of the global initiative to strengthen the oversight and regulation of the shadow banking system. It briefly presents the rationale and principles for regulatory measures that have guided the work of the different international bodies involved. It also provides brief summaries to the work of the Basel Committee on banks’ interactions with shadow banking entities, which Basel 3 has subjected to capital requirements, and the International Organisation of Securities Commissions (IOSCO) recommendations on Money Market Funds (see FReD 12 October) and Securitisation (see below). This document also notes that the Basel 3 framework may increase incentives for arbitrage and therefore the oversight and regulation of shadow banking will require ongoing review.

These last three documents are open for consultation until 14 January 2013.

The Basel Committee will make further recommendations by mid-2013. FSB will complete its work on securities lending and repo and prepare final detailed recommendations for each aspect of shadow banking by September 2013. In the meantime, member jurisdictions must use the policy framework to identify shadow banking entities. Later, their implementation of the final FSB recommendations will be overseen through peer reviews and the annual global shadow banking monitoring report. (Source: Global Shadow Banking Monitoring Report, Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities, Policy Recommendations to Address Shadow Banking Risks in Securities Lending and Repo, and An Integrated Overview of Policy Recommendations)