‘Shadow banking’ needs regulation

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The Financial Stability Board (FSB) Regional Consultative Group for Asia (RCGA) in its fifth meeting discussed the need to regulate the shadow banking system in Asia.

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In the meeting which was held recently in Tokyo, Japan, the members of the board considered the FSB’s high-level policy framework for strengthened oversight of shadow banking relevant for the region.

Shadow banking involves financial intermediaries involved in facilitating the creation of credit across the global financial system, but whose members are not subject to regulatory oversight. The shadow banking system also refers to unregulated activities by regulated institutions.

The FSB noted that shadow banking activities differ across countries and hence the need for proportionality in the regulatory response, taking into account national circumstances and regulations in place.

“Also from an Asian perspective, members considered the impact on the region of the framework for, and requirements applicable to, systemically important financial institutions,” the board stated.

FSB members also noted the benefits from greater institutional resilience, strengthened supervision, and improved resolvability of global systemically important banks.

“They also noted the possibility of some deleveraging and discussed policies that could be implemented to mitigate such impacts were they to arise,” it added.

On the other hand, the board members also discussed the progress and challenges in the implementation of reform to over-the-counter derivatives market; efforts underway to reduce the mechanistic reliance on credit ratings and to strengthen oversight of credit rating agencies; and the governance and oversight of financial benchmarks.

Members also discussed vulnerabilities and regional financial stability issues, including the potential impact on Asia of a reduction in quantitative easing programs underway by a number of central banks.

The FSB was established to coordinate at the international level the work of national financial authorities and international standard setting bodies, and to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies in the interest of financial stability.

It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts.

The FSB is chaired by Mark Carney, governor of the Bank of England. Its Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

The FSB Regional Consultative Group for Asia is co-chaired by Masamichi Kono, vice commissioner for International Affairs at the Financial Services Agency of Japan and Amando Tetangco Jr., governor of the Bangko Sentral ng Pilipinas.

Membership includes financial authorities from Australia, Cambodia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Pakistan, the Philippines, Singapore, Sri Lanka, Thailand and Vietnam.

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