This document discusses shadow banking and efforts to regulate it. Shadow banking involves credit intermediation outside the traditional banking system. While it can expand access to credit, it also poses risks. To address these risks, authorities have adopted a two-pronged strategy involving monitoring shadow banking activities globally and strengthening oversight of specific shadow banking entities and transactions. The 2014 monitoring exercise found that non-bank financial intermediation has grown to $75 trillion globally, with emerging markets showing the most rapid growth. Next steps include continued monitoring and developing regulatory frameworks for areas like money market funds and securities financing transactions.

1. Transforming Shadow Banking
into Resilient Market-based
Financing
An Overview of Progress and a
Roadmap for 2015

2. What it is..
• Shadow banking, broadly defined as credit intermediation
outside the conventional banking system
• Shadow banking can complement traditional banking by
expanding access to credit or by supporting market liquidity,
maturity transformation, and risk sharing.
• Such intermediation, appropriately conducted, provides a
valuable alternative to bank funding which supports real
economic activity. It is also a welcome source of
diversification of risks to credit supply from the banking
system, and it provides healthy competition for banks.

3. Risks Associated with Shadow Banking:
• As shadow banks do not take deposits, they are subject to less
regulation than traditional banks.
• They can increase the rewards from investments by leveraging
much more than their mainstream counterparts.
• Shadow banks can also cause a build-up of systemic
risk indirectly because they are interrelated with the traditional
banking system.
• As shadow banks use a lot of short-term deposit-like funding
but do not have deposit insurance like mainstream banks, a
loss of confidence can lead to "runs" on these unregulated
institutions.
• Shadow banks collateralised funding is also considered a risk
because it can lead to high levels of financial leverage.

4. Two-pronged strategy to deal with
Problems
A system-wide monitoring framework
• The FSB began conducting annual monitoring exercises to
assess global trends and risks in the shadow banking system
in 2011 and published the results of its exercise.
• These exercises have prompted an increasing number of
national and regional authorities to regularly assess the risks
of shadow banking, so that the monitoring now covers 25
jurisdictions representing 80% of global GDP and 90% of
global financial system assets.

5. Monitoring of Shadow Banking
• MUNFI: The primary focus of the monitoring is a “macro-mapping”
based on balance sheet data of national financial accounts that looks
at all non-bank financial intermediation. This conservative estimate,
referred to as the Monitoring Universe of Non-Bank Financial
Intermediation (MUNFI), ensures that data gathering and
surveillance cover the areas where shadow banking-related risks to
the financial system might potentially arise.
• Narrow Measure: This year’s report also continues to refine the
shadow banking measure by also reporting a narrower measure of
the broad MUNFI estimate, which is constructed by filtering out
non-bank financial activities that have no direct relation to credit
intermediation (e.g. Equity Investment Funds) or that are already
prudentially consolidated into banking groups. As a result, this
narrower measure more accurately reflects the size and composition
of the shadow banking sector.

6. Main findings from the 2014 exercise:
• According to the MUNFI estimate, based on assets of Other
Financial Intermediaries (OFIs), non-bank financial intermediation
grew by $5 trillion in 2013 to reach $75 trillion.
• By absolute size, advanced economies remain the ones with the
largest non-bank financial systems. Globally, MUNFI assets
represent on average about 25% of total financial assets, roughly
half of banking system assets, and 120% of GDP. These patterns
have been relatively stable since 2008.
• Emerging market jurisdictions showed the most rapid increases in
OFIs. Nine emerging market jurisdictions had 2013 growth rates
above 10%.
• Among the MUNFI sub-sectors that showed the most rapid growth
in 2013 are Trust Companies and Other Investment Funds.

7. Strengthening the oversight and regulation of
shadow banking
• Mitigating risks in banks’ interactions with shadow banking
entities
• Reducing the harm of MMFs to “runs”
• Improving transparency and aligning incentives in
securitisation
• Dampening pro-cyclicality and other financial stability risks in
securities financing transactions
• Assessing and mitigating systemic risks posed by other
shadow banking entities and activities

8. Next Steps
• Monitoring of the global trends and risks in the shadow banking
system
• Development of the guidance on the scope of consolidation for bank
prudential regulation:
• Finalisation of the application of numerical haircut floors for non-
centrally cleared SFTs to non-bank-to-non-bank transactions
• Implementation of the regulatory framework for haircuts on non-
centrally cleared SFTs at the international level Finalisation of the
standards and processes for the global securities financing data
collection and aggregation
• Preparation of the findings on the possible harmonisation of
regulatory approaches to re-hypothecation
• Refinement of the information-sharing process for the high-level
policy framework for other shadow banking entities
• Monitoring the implementation of policy recommendations

9. THANK YOU