FSB to bolster regulation of $67trn shadow banking industry

The Financial Stability Board is seeking to impose tougher oversight and regulation of the global shadow banking system, which hit a record $67 trillion at the end of last year.

The financial regulator said the shadow banking system – which can also be described as activities outside the regular banking system – poses systemic risks, which the FSB believes requires policies to contain them.

It has published, for public consultation, a set of policy recommendations to bolster the shadow banking system, which has grown from $26 trillion in 2002.

The recommendations focus on five specific areas where the FSB believes there is a need for policies.

This set of of potential policies includes the need to mitigate the spill-over between the regular banking system and shadow banking system.

It said money market funds need to become less susceptible to runs on banks.

The FSB called for the need to assets and mitigate systemic risks posed by other shadow banking entities.

The regulator also highlighted the importance of dampening risks and incentives associated with secured financing contracts, such as securities lending, which could exacerbate funding strains in times of runs.

Lastly, the FSB said there was a need to assess and align the incentives associated with securitisation.

The FSB is accepting responses to this initial set of policy recommendations before 14 January next year.