shadow banking - imf.pdf

8/15/2019 Shadow Banking - IMF.pdf

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Shadow Banking:

Global and Emerging Market

Gaston GelosDivision Chief

October 26, 2015

1. What is shadow banking, how has it evolvedand what are common drivers?

. en oes s a ow an ng ac v y ecomea risk to financial stability?

3. How has regulation and supervision changedan w a ur er measures are e y ornecessary?

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1. Shadow banking trends and drivers

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Shadow Banking: Benefits, Risks

e n ons

Broad:

Benefits

+ access to credit

Nonbank entities thatprovide credit

(+) risk sharing

nterme at on ut ess

regulated than banks and

Narrow: Risks

- -rea er ocus on morerisky entities/activities or (-) run risk & contagion

arbitrage


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BanksDepositsLoans

s M on e y

S e c u r i t i e

Dealersoney

Securities

oney

Securities

e y s i e

s

1 e c u r i t i e s

M o n

L o a

M o n e

S e c u r i t

M o n e y

Money market

ecur t zat on

Money L o a n s

mu ua un s

u r i t i e s

u r

i t i e s

o n

e y

o n

e y

Hedge fundsMoney

S e

S e c M M

L o a n s

M o n e y

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Finance companies and other

nonbank lenders

Money Loans

Growth of Shadow BankingBroad measure, relative to GDP

UKEuro area

in % GDP

300

Other AEChina

200

Ot er EM

100

0

2002 2006 2010 2014e

. .

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Growth of Shadow BankingRelative to banking sector

US

Euro area

in % banking assets

150

Other AEChina

100

50

0

2002 2006 2010 2014e

. .

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8CAGR: compound annual growth rate


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Size of the Shadow Banking Sector (% GDP)

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Shadow Banking in AsiaShare of total OFI assets

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Shadow bankin in AsiaSubsectors

Money Market Funds

(ex Japan)

s n apan, ,

Canada

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Links to the Banking System Asian Banking Sector Assets with Shadow Banks

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Shadow bankin in AsiaSubsectors

Finance Companies Structured Finance

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a n c e d

o m i e

A d v

E c o

g i n g

m i e s

E m e

E c o n


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.become a risk to financial stability?

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• provide credit while banks repairbalance sheets and deleverage

access to

• tailor risk-return distributions thatfit ultimate investors

e er r ssharing

• -Improving

as banks reduce presencemar eliquidity

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• Redem tions/fire sales. No backsto s not banks).

• Intermediation chains are separatedproblems

• Monitoring more difficult than for banks.Opacity andcomplexity

• Shadow banking facilitates leverage whenasset prices high. Abrupt changes in

stress eriods.

Leverage and

roc clicalit

• Shocks transmitted to rest of the systemthrough ownership links, flight to qualitySpillovers

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an re sa es

g everage

Asset/liabilit maturit mismatches

High interconnectedness with banks

(very) rapid growth

(very) large entities/sectors

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Evaluation of risks:Quantitative or Qualitative Analysis

s cor ng n vance conom es s cor ng n merg ng ar e s

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Risks in Asia (within countries)Based on RCGA survey (2014)

• Japan, Korea, ThailandLeverage risk

• China, India, Japan, Malaysia, Pakistan,Phili ines, Thailand

Maturity and liquidity

• S illover to banks: Australia India KoreaInteractionMalaysia, Philippines

• Dependence on bank funding: Pakistanbanks/shadow

banks

• India, Malaysia, Philippines, New ZealandRegulatory arbitrage

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Cross-border Impact?Based on RCGA survey (2014)

• Small size of shadow banking sector

• Markets at earl sta e ofImpact on restdevelopment. Products are simple.

• Limited cross-border exposures

insignificant

• Australia: money market corporations

•

beyond Asia

- • Singapore investment funds

border

ex osures

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3. How has re ulation and su ervisionchanged and what further measuresare likel or necessar ?

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Main Principles of Shadow

Banking Regulation (FSB)

• Define, and keep up to date, the

• Collect information to assess risks

• Enhance disclosure to help market

• Take action based on policy toolkit and

unc ons per orme y s a ow an s

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Effective Regulation Must Cover

Both Activities and Entities

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The figure shows four activity types (A1–A4) and three entity types (E1–E3). Entity-based regulation that covers only entity type E2 would miss

the migration of, say, activity type A3 from E2 to E1; but that migration would be picked up by activity-based regulation covering A3. Similarly,

activity-based regulation that covers activity type A3 would miss situations in which covered entities (E1–E3) migrate to activities, say A2, that

are not covered but have similar economic outcomes.


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Regulatory Reforms so far:Financial Stability Board Workstreams

• consolidation, investments in funds,

• large exposure rules

Bank-nonbank

interactions

• common standards agreed

• changes in valuationMMF susceptibility

to runs

• transparency, standardization, retentionSecuritization

• dampen procyliclicality of margining

Sec lending and

• supervisory cooperation, prudential tools,Other shadow

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,

Regulatory Reforms underway:Financial Stabili ty Board

• ,intermediaries, asset management and funds

systemic importance

• owar s more ac v y- ase po cy measures

market-based finance

• further work on haircuts risk data collection &aggregation

ec en ng an repo

• further identify known unknowns across thewhole shadow banking universe

• Peer reviews in 2015 of frameworks, policiesImplementationan too s or s a ow an ngmon tor ng

• CCPs: decisions on ELA, recovery &Making derivatives

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reso u on, n orma on s ar ng- ra e repor ngmar e s sa er


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address shadow banking risks in Asia• Also take into account existing

• Should not inhibit economic

eve opmen

• New risks ma emer e over time andrequire new policy responses

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FSB Workstreams Applicability in Asia

• Recommendations generally applicable

• MMFs do not exist/differ in scale across Asia

MMFsusceptibility to

• Applicable, subject to some calibration

• Market is small and not complex

• Not fully relevant given size, composition market

• Unintended consequences for market developmentec lending andrepo markets

• Some policy tools less relevant/effective• Need to balance stability and development goals

Other shadowentities

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Monitoring

• Look across entities,

activities, risks

and data • Macroprudentialframework

• Addressing causesdemand and su l

ew oo s

re ulation+

• Access to centralbank facilities

bankruptcy regimes

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Regulatory reforms: What is missing?

Encompassing policy framework

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• Set up macroprudential oversight

agency

Addresss stemic

• A policy framework: systemic riskfocus, tools

stabilityrisks

•maturity/liquidity transformation, risktransfer, leverage

• Bank in one countr ma be shadowNo one- bank in another • Regulate and supervise risky

activities/entities more stron l

s ze- s-a

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Example: Adressing liquidity risk

and run risk for funds

•Conduct liquidity stress tests

•Liquidity buffer requirements;•Limits on investments in illiquid assets as a

propor on o asse s;

•Limits on asset concentration in particular

•Limits on leverage

•Redem tion fee structures

•Redemption gates•Adequate pricing rules of fund shares

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oun ry examp es or scuss on

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FSAP 2010:

• “The ra id rowth in nontraditional bankin activities

in recent years is generating new risks, underlining

the importance of strengthening the regulatory

framework.”• “Although some of these changes reflect desirable

nnova on an grow o e nanc a sec or, ey

partly reflect differences in the regulatory and tax

”.

• “As MFIs are small, this in itself does not pose risks

to the financial s stem. However banks are o enin

microfinance units. Hence, the border between theregulated banking sector and the largely unregulated

microfinance sector is increasingly porous.”

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AIV 2014:

• “Financial service providers in Bhutan can be broadly

categorized as formal financial institutions (banks and

nonbank financial institutions), informal moneylenders,

cooperatives.”

• “NBFIs -insurance com anies and ension boards- have

been allowed to engage in retail lending activities.[…]

authorities are now developing investment guidelines for

”- .

• “There is no formal microfinance sector in Bhutan,

althou h several civil societ or anizations or

intermediaries provide financial services. Informalcreditors dominate the market in communities where

”nanc a ns u ons ave e presence.

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• “Proliferation of real estate financing from the

” .

• “

real estate loans at competitive interest rates,

effectively competing with banks.”

• “However, their funding sources remain largely

obscure and beyond regulatory and supervisoryoversight.”

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Art IV 2014:

• “By most international standards, Myanmar’s financial

sector is still small. And the current structure of the

nanc a sys em cons s s o our s a e owne an s,23 private banks, 42 foreign bank representative

-, ,

owned insurance company, 12 private insurance

companies, 189 microfinance institutions licensed,

and 3 upcoming policy-based banks, impending entry

of foreign banks and a nascent capital market.”

• “Other priorities include developing a plan to reform

the state-owned banks and establishing appropriate

”

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• “As of April 2014, the NRB regulated 30 Class A, ,

56 Class C finance companies, and 35 Class D

microfinance banks.”

• “In addition, a very large number (about 17,000) of

credit cooperatives exist outside the NRB’s

superv sory per meter.

• “The largely unsupervised cooperatives sector is

grow ng rap y, par y ue e y rec e en ng

policies, and poses a significant risk to the stability of

” .

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AIV 2014:

• “There are 24 commercial banks in Sri Lanka and nine

specialized banks. In the NBFI sector, there are 58—

companies.”

• “While not large, the NBFI sector has been more prone to

weakness.”

• “The CBSL announced in January 2014 a financial sector

conso a on p an o re uce e num er o s an

create larger banks.”

• capital base may add some resilience to shocks,

potentially generate cost efficiencies, and should also

a ow or c oser overs g .

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-

• Shadow banking differs between countries, in.

EMDEs but from low levels.

•

• Shadow banking in emerging economiesgenerally beneficial for financial sectoreepen ng.

• owever, regu a ory re orms are un erway, oavoid that risks simply migrate from one part of

the financial s stem to another. Re ulatorsshould work to avoid this through cooperation,exchange of information, and better data for risk

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.

THANK YOU

shadow banking - imf.pdf

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