Policing of $36 Trillion Shadow Banks Still Needs Work, FSB Says

  • Regulators need to do more to master potential risks
  • Investment funds are biggest, fastest growing non-banks

Regulators still lack the data and legal instruments they need properly to oversee the $36 trillion global shadow-banking industry and tackle the risks it may pose to financial stability, according to the Financial Stability Board.

The FSB’s member jurisdictions, comprising the most important developed and emerging economies, still have inconsistent rules to identify shadow banks, a relatively young term whose meaning can vary across borders, according to a FSB report released on Wednesday. Financial data and disclosure are not always adequate and cross-border cooperation faces impediments, the Basel-based regulator said.

“Notwithstanding the progress made, the peer review findings indicate that implementation of the policy framework remains at a relatively early stage,” the FSB said. “More work is needed to ensure that the framework’s application is rigorous enough for jurisdictions to comprehensively assess and respond to potential financial stability risks posed by non-bank financial entities.”

While excessive risk-taking by banks has been reined in since the collapse of Lehman Brothers Holdings Inc., regulators are concerned that lenders might use shadow banking to evade the clampdown and cause risks to build up out of sight. The Group of 20 nations asked the FSB, led by Bank of England Governor Mark Carney, to keep track of the industry and develop rules to keep it in check.

The FSB’s most recent survey of the industry’s size based on assets as of end-2014 shows the U.S. as the biggest home to shadow banks, with 40 percent of the total. The U.K. follows with 11 percent, and Ireland with 8 percent.

The biggest and fastest-growing segment of non-bank financial entities are investment funds, not all of which fall into the FSB’s narrow shadow-banking definition, highlighting the importance of securities regulators for financial stability, the FSB said.

“The need for a systematic process becomes even more apparent in light of the common challenges identified by jurisdictions -- data gaps, resource constraints, timing issues, cross-border coordination, insufficient mandates -- in bringing non-bank financial entities that could pose financial stability risks within the regulatory and supervisory perimeter in a timely manner,” according to the FSB.

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