Starting point is the so-called Shadow Banking Roadmap which was published for the first time (also on Germany's initiative) in the context of the G20 Summit in 2013 and updated the following year. Amongst other things, the roadmap provides for an evaluation of the case for development of further policy recommendations for relevant shadow banking entities.

The FSB has now published its respective report, in which it describes the activities and risks of shadow banking entities since the financial crisis, assesses the regulatory measures adopted to date and provides recommendations to reduce residual gaps.

Significantly less engagement in critical activities

The report comes to the conclusion that many of the shadow banking activities which contributed to the financial crisis have declined significantly and currently no longer represent a risk to global financial stability. In light of the global regulatory initiatives already adopted, neither does the FSB currently see any new shadow banking risks which warrant additional regulatory action at global level.

Nevertheless, the Financial Stability Board emphasises the innovative strength that the shadow banking sector possesses. According to the FSB, it is therefore necessary to monitor the sector even more closely. That is why the members of the FSB agreed on a number of recommendations.

Systematic oversight, regulation and supervision

According to the FSB, it is first necessary to systematically capture the activities and risks associated with the shadow banking sector. In addition, the FSB calls for competent authorities to ensure that all shadow banking entities and activities which entail material risks to financial stability are regulated and placed under supervision.

With these recommendations, the FSB picks up on the results of a peer review, wherein it evaluated the implementation of the policy framework for shadow banking entities. The FSB intends to conduct another such peer review in 2020 to examine the progress made with regard to the implementation.

Improving data collection

Regarding data collection, the Financial Stability Board acknowledges that progress has been made but, nevertheless, sees remaining data gaps and a lack of data granularity, which make forward-looking risk analysis difficult. It therefore calls on the national competent authorities to make increased efforts in the areas of data collection and risk assessment, for example by gathering additional information about risk concentrations. If shadow banking risks re-emerge, the member states should monitor these closely and share their findings in the relevant international expert committees.

A report published recently by the FSB (see BaFinJournal of June 2017 – only available in German) provides an overview of the scope of, risks associated with and trends in the shadow banking sector.

Finalising the policy initiatives

In addition, the FSB urges the prompt adoption of the still outstanding policy initiatives at international level and the timely and consistent implementation of the respective recommendations in the individual member states.

The FSB considers it particularly important that the Basel Committee on Banking Supervision (BCBS) adopt its Guidelines for the identification and management of step-in risk before the end of the year.

Reducing risks in the asset management sector

In light of the fact that a large share of the growth in the shadow banking sector in recent years can be attributed to investment funds, the Financial Stability Board also stresses the importance of substantiating and operationalising the recommendations to reduce structural vulnerabilities in the asset management sector, which it adopted at the beginning of the year (see BaFinJournal of February 2017 – only available in German).

In this context, it calls on the International Organization of Securities Commissions (IOSCO) to adopt recommendations to reduce liquidity transformation in the case of open-ended investment funds by the end of 2017. IOSCO has already published two consultation papers on this matter: Consultation on CIS Liquidity Risk Management Recommendations and Open-ended Fund Liquidity and Risk Management – Good Practices and Issues for Consideration. The industry can comment on both papers by 18 September.

By the end of 2018, the FSB also intends that IOSCO will have developed consistent measures to determine leverage.

Timely, consistent implementation

Since the shadow banking sector in particular tends to exploit regulatory differences, the FSB is of the view that it is all the more important here that national and regional supervisory authorities implement the agreed measures to reduce shadow banking risks in a timely and consistent manner.

During their implementation monitoring, the FSB, IOSCO and the BCBS found that there were differences across jurisdictions – both in terms of the level of implementation as well as in terms of content, in other words with regard to the way in which the individual regulatory recommendations are implemented.