How Should We Regulate Shadow Banking

Economics

How should we regulate shadow banking ?

Contents

Introduction

Page 1

I) The features of the shadow banking system and the reasons why it should be regulated

Page 2

* Features

* The role of shadow banking in the triggering of the crisis

II) Proposed measures to regulate the shadow banking system

Page 4

* Modifying accounting consolidation rules so that they take into account off-balance sheet exposure

* Reviewing the risk-based capital requirements

* Regulating securitisation

* Regulating repurchase agreements

* Limiting the role of credit rating agencies

Conclusion

Page 8

Introduction

Much has been said about the “Shadow banking”, but the least we could say is that it remains a very nebulous notion. The Financial Stability Board, an international body which oversees and makes recommendations about the global financial system, has tried to clarify the concept. Broadly speaking, the shadow banking system is defined as a credit intermediation system that involves entities and activities outside the regular banking system. Thus, the term “shadow banking” designates both the financial entities which are not concerned by any financial regulation and the activities they conduct. The shadow banking system is made up by entities like hedge funds, money market funds, structured investment vehicles (SIVs), special purpose vehicles (SPVs) and other non-bank financial institutions (insurance companies, mortgage companies etc.).

According to figures, by nature uncertain, from the Financial Stability Board, the size of the shadow banking system grew up tremendously before the beginning of the crisis, from about $27 trillion in 2002 to $60 trillion in 2007. The size of the shadow banking system of course sharply declined during the crisis but has since returned to its pre-crisis level. According to specialists, the shadow banking system makes up between 25 and 30 percent of the global financial...