FSB has published a report and recommendations on how to strengthen the oversight and regulation of shadow banking. FSB notes the advantages that intermediating credit through non-bank channels can bring, but stresses the systemic risks the shadow banking system can cause both in itself and because of its interconnections with the regular banking system. The report sets out high-level principles for authorities to have in mind when assessing how best to monitor shadow banking in their jurisdictions and also includes general principles for regulatory measures. It then sets specific recommendations on:

  • regulation of banks' interactions with shadow banking entities: these recommendations will create indirect regulation by (i) making banks include in their balance sheet any shadow banking entities they sponsor; (ii) setting tougher limits on the size and nature of a bank's exposure to shadow banks; (iii) reviewing risk-based capital requirements for banks to ensure they properly take account of exposure to shadow banks; and (iv) restricting banks' ability to stand behind any unconsolidated entities;
  • reforming regulation of money market funds (MMFs): FSB recommends the International Organization of Securities Commissions (IOSCO) considers potential reforms that would mitigate the susceptibility of MMFs to runs and other systemic risks and asks for a report from IOSCO by July 2012;
  • assessing and enhancing regulation of other shadow banking entities: FSB plans a new workstream to look at this and to report by September 2012;
  • addressing incentives associated with securitisation: FSB wants IOSCO to produce a report on proposed and adopted rules in the EU and US by July 2012 and to work with Basel to look at how jurisdictions deal with retention and transparency requirements related to securitisation;
  • regulation of secured funding markets, specifically repos and stock lending: FSB has identified significant risks in these markets and will report on possible policy recommendations to address the risks by the end of 2012;
  • improving the transparency and the reporting of information;
  • ensuring rigorous underwriting standards; and
  • continuing to monitor the role of Credit Rating Agencies in facilitating shadow banking activities.

(Source: FSB Makes Shadow Banking Recommendations)