Further to a detailed consultation process carried out in late 2012, the Financial Stability Board (FSB) has published a series of final policy recommendations to strengthen the oversight and regulation of the "shadow banking" system. The policy recommendations take account of comments received during the consultation process. The FSB describes shadow banking as "credit intermediation involving entities and activities outside the regular banking system", including entities such as SPEs and hedge funds, and has specifically stated that securitisation vehicles should be subject to greater scrutiny in future. In addition to the development of a monitoring framework to assist national authorities in identifying and addressing any build-up of systemic risk in the shadow banking sector, the FSB has developed a set of policies to address the potential systemic risks associated with shadow banking, which focus on five key areas: (i) mitigating the spill-over effect between the regular banking system and the shadow banking system; (ii) reducing the susceptibility of money market funds to "runs"; (iii) assessing and aligning the incentives associated with securitisation; (iv) dampening risks and pro-cyclical incentives associated with secured financing contracts such as repos and securities lending that may exacerbate funding strains in times of "runs"; and (v) assessing and mitigating systemic risks posed by other shadow banking entities. The FSB has now announced that it has published in final form:
- An Overview of Policy Recommendations: which sets out the FSB's overall approach to strengthening the oversight and regulation of shadow banking in the five specific areas noted above and notes the work undertaken to date in this area (by the FSB and other bodies, including the International Organisation of Securities Commissions (IOSCO) and the Basel Committee on Banking Supervision). The Overview also sets out the FSB's next steps, which include deciding on the implementation timetable for the various policy recommendations.
- A report entitled Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos: which sets out recommendations for addressing financial stability risks, including enhanced transparency, data collection and reporting, increased regulation of securities financing (by establishing minimum standards that would both set the bar higher and limit regulatory arbitrage) and improvements to market structure (including through the use of central counterparties to clear trades). A set of further consultative proposals, on the minimum standards for methodologies to calculate haircuts on non-centrally cleared securities financing transactions, and a framework of numerical haircut floors, are set out in Annex 2, on which the FSB seeks comments by 28 November 2013.
- A report entitled Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities: which sets out the FSB's high-level policy framework for assessing and addressing risks posed by shadow banking entities other than money market funds (e.g. collective investment vehicles, loan provision that is dependent on short-term funding, intermediation that is dependent on short-term funding, the facilitation of credit creation, and securitisation-based credit intermediation (to the extent not covered by earlier initiatives noted above and below)). Taking into account that fact that markets and products innovate and develop, the framework is designed to be responsive to emerging threats to financial stability posed by new shadow banking activities.
As for securitisation, the FSB notes that IOSCO has already set out final policy recommendations (for supervisors) in this area, in its paper entitled Global Developments in Securitisation Regulation. Those recommendations focused on aligning incentives between issuers and investors, harmonising the regulatory approaches to risk-retention and asset-level reporting, and encouraging standardisation. IOSCO will also conduct a peer review on the national approaches taken to align incentives associated with securitisation, including risk retention requirements, in 2014, and will then report back to the FSB. The FSB's Overview of Policy Recommendations paper notes that "[t]he resumption of orderly securitisation markets is a goal of the wider financial reform programme, and the FSB, in collaboration with other standard-setting bodies, will continue to review and address regulatory impediments in this regard."
FSB: An Overview of Policy Recommendations
FSB: Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos
FSB: Policy Framework for Strengthening Oversight and Regulation of Shadow Banking Entities
IOSCO Global Developments in Securitisation Regulation