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September 14, 2017

Tobias Adrian, the Financial Counsellor and Director of the Monetary and Capital Markets Department of IMF, spoke about the conceptual framework of shadow banking and market-based finance. He examined the economic characteristics and motivations that distinguish certain aspects of shadow banking from other forms of credit-based intermediation—like traditional banking and market-based finance.

As FSB has articulated, market-based finance is the more resilient version of shadow banking. Mr. Adrian highlighted resilience might stem from greater simplicity, transparency, and standardization, as reflected in less pronounced, complex and/or opaque structuring and risk transformation. He added that forms of resilience might add up to create modes of capital intermediation that productively help to complete markets, without posing undue financial stability risks. However, certain aspects of shadow banking could potentially pose concern. Among the key changes to have unfolded in global patterns of non-bank credit intermediation since the financial crisis, two stand out. At the activity level, there has been a material swing away from riskier aspects of shadow banking toward market-based finance. And at the geographical level, there has been a relative increase in the emerging market share of global non-bank intermediation.

 

The first notable trend, most pronounced in advanced economies, has been a reduction in the types of shadow banking activities that amplified the effects of the global financial crisis. There has been a generalized flight to simplicity and transparency in the intermediation of non-bank credit, away from the more opaque forms of shadow banking, toward more resilient forms of market-based finance. Since the crisis, a concerted policy effort has been undertaken to strengthen the regulation and oversight of non-bank credit intermediation, with the aim of promoting more resilient forms of market-based finance. Other important shadow banking reform priorities have focused on dampening risks associated with securities financing transactions and over-the-counter (OTC) derivatives.

 

Mr. Adrian concluded that, "We should derive some comfort that in advanced economies, many of the types of activities that amplified the impact of the global financial crisis no longer pose an existential threat to financial stability. Further, we note, however, that certain areas of reform remain outstanding. Harmonizing retention rules, reforming certain rating agency practices, and winding back implicit official backstops are examples of issues to be tackled. And important data and disclosure gaps remain with respect to collective investment vehicles and cross-border inter-connectedness. We must stay attentive to the emergence of new challenges such as FinTech for instance. We have made important progress in achieving the constantly moving target of a system of resilient market-based finance that supports productive risk-taking and economic growth."

 

Related Link: Speech

Keywords: International, Banking, Shadow Banking, Market Based Finance, Financial Stability, IMF

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