## 45663-dp1814-shadow-banking - Conclusion ## Source details **Canonical URL:** [45663-dp1814-shadow-banking - Conclusion](https://www.imf.org/-/media/files/publications/dp/2018/45663-dp1814-shadow-banking.pdf) ## Other formats - [Markdown version](/-/media/files/publications/dp/2018/45663-dp1814-shadow-banking.pdf.md) - [Structured JSON version](/-/media/files/publications/dp/2018/45663-dp1814-shadow-banking.pdf.json) --- ### Key findings - Innovations in nonbank credit intermediation (NBCI) respond to unmet needs and preferences of borrowers and lenders and can help complete markets by giving issuers new outlets for capital raising and providing lenders more avenues for portfolio diversification. - NBCI can yield greater efficiencies and risk-sharing capacity, but the global financial crisis highlighted risks to financial stability associated with NBCI. - The label “shadow banking” has been broadly used to characterize private credit intermediation occurring outside the formal banking system, but such general labels can obscure widely varying structural characteristics and economic motivations of NBCI—“not all forms of NBCI are created equal.” ### Conceptual framework - The paper lays out a conceptual framework to distinguish features of shadow banking that make it a less resilient form of market-based finance. - The framework draws on earlier IMF analysis and that of the Financial Stability Board (FSB), including IMF 2014, 2015; FSB 2015, 2017b. - Distinguishing structural features, economic motivations, and risk implications across variants of NBCI is essential to assessing which forms pose financial stability risks. ### Evolution, policy responses, and progress - The discussion is anchored on how different forms of shadow banking—and market-based finance more generally—that make up NBCI have evolved since the global financial crisis. - The postcrisis reform agenda, driven in part by the FSB in response to a request from the Group of 20 (G20) leaders at the 2010 Seoul Summit, has made substantial progress in making NBCI more resilient. - Many of the amplification forces that were at play during the global financial crisis have diminished. ### Remaining risks and policy implications - The postcrisis reform agenda is not yet complete; policymakers must remain attentive to new challenges looming on the horizon. - A nuanced assessment of NBCI requires careful disentangling of structural characteristics and economic motivations to inform targeted regulatory and supervisory responses. - Continued international coordination (building on IMF and FSB work) remains important to address cross-border and systemic aspects of NBCI. ### Case studies and jurisdictional lessons - The paper includes case studies of policy challenges arising in different jurisdictions to illustrate the diversity of NBCI structures and associated policy responses. ### Acknowledgments and provenance - This paper builds on a speech at the 33rd SUERF colloquium held at the Bank of Finland in Helsinki, Finland, on September 14, 2017. - The authors acknowledge contributions from Peter Breuer, Chris Colford, Pete Dattels, Daniel Hardy, Dong He, Nigel Jenkinson, Hui Miao, Aditya Narain, Fabio Natalucci, Robert Patalano, Christoph Rosenberg, Ratna Sahay, Manmohan Singh, Narayan Suryakumar, and other colleagues in the Money and Capital Markets Department. - The term “shadow banking” was coined by McCulley (2007), with taxonomies provided by Pozsar (2008) and Adrian and Shin (2009, 2011). ### Key assessment - Technologies stand out in presenting risks and opportunities. - For all the progress that has been made since the global financial crisis, it remains an open-ended challenge to mitigate the risks while preserving the benefits of all forms of credit growth. ### Policy priority - Ensure that NBCI supports productive risk taking and economic growth well into the future. *Source: Conclusion, IMF Working Paper (content unit: 45663-dp1814-shadow-banking - Conclusion).* ### Conclusion ������������������������������������������������������������������������������������������������������������� ### Conclusion ### Key findings - Innovations in nonbank credit intermediation (NBCI) respond to unmet needs and preferences of borrowers and lenders and can help complete markets by giving issuers new outlets for capital raising and providing lenders more avenues for portfolio diversification. - NBCI can yield greater efficiencies and risk-sharing capacity, but the global financial crisis highlighted risks to financial stability associated with NBCI. - The label “shadow banking” has been broadly used to characterize private credit intermediation occurring outside the formal banking system, but such general labels can obscure widely varying structural characteristics and economic motivations of NBCI—“not all forms of NBCI are created equal.” ### Conceptual framework - The paper lays out a conceptual framework to distinguish features of shadow banking that make it a less resilient form of market-based finance. - The framework draws on earlier IMF analysis and that of the Financial Stability Board (FSB), including IMF 2014, 2015; FSB 2015, 2017b. - Distinguishing structural features, economic motivations, and risk implications across variants of NBCI is essential to assessing which forms pose financial stability risks. ### Evolution, policy responses, and progress - The discussion is anchored on how different forms of shadow banking—and market-based finance more generally—that make up NBCI have evolved since the global financial crisis. - The postcrisis reform agenda, driven in part by the FSB in response to a request from the Group of 20 (G20) leaders at the 2010 Seoul Summit, has made substantial progress in making NBCI more resilient. - Many of the amplification forces that were at play during the global financial crisis have diminished. ### Remaining risks and policy implications - The postcrisis reform agenda is not yet complete; policymakers must remain attentive to new challenges looming on the horizon. - A nuanced assessment of NBCI requires careful disentangling of structural characteristics and economic motivations to inform targeted regulatory and supervisory responses. - Continued international coordination (building on IMF and FSB work) remains important to address cross-border and systemic aspects of NBCI. ### Case studies and jurisdictional lessons - The paper includes case studies of policy challenges arising in different jurisdictions to illustrate the diversity of NBCI structures and associated policy responses. ### Acknowledgments and provenance - This paper builds on a speech at the 33rd SUERF colloquium held at the Bank of Finland in Helsinki, Finland, on September 14, 2017. - The authors acknowledge contributions from Peter Breuer, Chris Colford, Pete Dattels, Daniel Hardy, Dong He, Nigel Jenkinson, Hui Miao, Aditya Narain, Fabio Natalucci, Robert Patalano, Christoph Rosenberg, Ratna Sahay, Manmohan Singh, Narayan Suryakumar, and other colleagues in the Money and Capital Markets Department. - The term “shadow banking” was coined by McCulley (2007), with taxonomies provided by Pozsar (2008) and Adrian and Shin (2009, 2011). *Source: Conclusion, IMF Working Paper (content unit: 45663-dp1814-shadow-banking - Conclusion).* ### Introduction ### 45663-dp1814-shadow-banking - Introduction ### Framework and Structural Characteristics - Shadow banking identified as a less resilient form of market-based finance; framework considers three dimensions: structural characteristics, economic motivations, and financial stability implications. - Structural features highlighted: - Transformations of Risk Characteristics: pooling and tranching of risk, credit enhancement, implicit guarantees; maturity and liquidity transformation are common to all credit intermediation, but leverage, complexity, and opaqueness tend to be more prominent in shadow banking. - Lengthy Networks: risk transformations performed along chains of specialized, interconnected intermediaries; reuse of collateral and lengthy collateral chains can heighten interconnectedness. - Implicit Private Sponsor Support: presumption of private sponsor support (implied credit guarantee or credit line) can subsidize funding costs. - Formal versus Indirect Access to Official Backstops: neither shadow banking nor market-based finance have formal access to official backstops, but shadow banks might benefit from indirect access due to closer linkages with traditional banks. - Funding Base: shadow banking liabilities are principally short-term runnable instruments; resilient market-based finance relies more on longer-term and less runnable financing. ### Economic Motivations for Intermediaries - Agency frictions and informational asymmetries: - Complexity, specialization, and opaqueness in shadow banking magnify misaligned incentives and informational frictions (origination abuse, adverse selection in securitization, ratings inflation). - (Mispriced) Sponsor Backstops and Contingent Liabilities: - Bank credit support lines to shadow banking affiliates can reduce funding costs of shadow entities and create presumption that liabilities are “money good.” - Regulatory Arbitrage: - Activities motivated by circumvention of capital, liquidity, taxation, or information requirements (example: bank guarantees to ABCP conduits structured to minimize regulatory capital). ### Financial Stability Implications - Shadow banking can contribute more to variability in the market price of risk and to systemic risk through: - Stress accelerants from extensive risk transformations and obscured underlying risk. - Transmission via interconnectedness and collateral chains. - Contingent liabilities for sponsors due to implicit backstops. - Vulnerability to runs and refinancing risk from runnable short-term funding. - Vulnerabilities are magnified when intermediaries exploit regulatory loopholes and when policymakers lack adequate instruments; sovereign balance sheets may be the ultimate costly backstop. ### Postcrisis Evolution and Trends - Two key global changes in NBCI since the crisis: - Less “Toxic” Shadow Banking: - Generalized “flight to simplicity and transparency”; regulatory changes and business-model reorientation. - By one measure (FSB Flow of Funds data), a roughly US$10 trillion swing toward standard collective investment vehicles between 2007 and 2015, and a US$6 trillion to US$7 trillion swing against other types of nonbank credit intermediation. - US Flow of Funds: assets intermediated through collective investment vehicles like bond mutual funds and ETFs have more than doubled since 2007, while assets of broker-dealers, finance companies, ABS issuers, and MMFs have almost halved. - Interconnectedness has been reduced, partly due to emergence of shorter collateral chains. - Deepening in Emerging Markets: - Emerging market share of global “other financial intermediaries” increased from 4 percent in 2011 to 11 percent in 2015. - Emerging market share of global MMF assets increased from 7 to 20 percent since 2012 (largely accounted for by CNAV MMFs in China). ### Strengthening Supervision and Regulation - Policy initiatives since the crisis: - FSB created system-wide monitoring framework and annual Global Shadow Banking Monitoring Report. - ESRB mapping in Europe; IMF intensified supervisory work via FSAPs and Article IV consultations. - Basel III reforms improved recognition and capitalization of banks’ explicit and contingent exposures to shadow banking, reducing off-balance-sheet credit insurance by deposit-taking institutions. - Reforms targeted securities financing transactions, over-the-counter derivatives, and triparty repo markets to reduce liquidity mismatches, constrain leverage, and improve market infrastructure. - Two illustrative reform outcomes: - Money Market Funds (MMFs): - US reforms (US accounts for about 60 percent of global MMF assets): prime institutional MMFs required to float NAV; new tools (liquidity fees and redemption gates); strengthened disclosure; bank sponsors more heavily capitalized for support lines. - Resulted in a significant shift away from prime institutional MMFs. - Europe adopts similar measures: variable NAV pricing for some MMFs, redemption fee and gating provisions, increased liquidity and diversification requirements, prohibition on MMF sponsor support. - Securitization: - Strengthened loan underwriting, expanded prudential consolidation, increased disclosure, and introduction of credit retention (“skin in the game”) requirements. - Issuance of riskier residential mortgage-backed securities (subprime, Alt-A, HELOC, Junior Liens) has all but ceased from prior peaks (peak just over US$1 trillion in 2006). ### Outstanding Priorities and Case Studies - Implementation gaps and lingering challenges: - FSB’s Policy Framework for Shadow Banking implementation is at an early stage; incentives and regulatory arbitrage concerns persist. - Credit Rating Agencies: issuer-pays model and possible continued ratings inflation; some Basel III rules remain mechanistically linked to CRA ratings. - Cross-border regulatory arbitrage risk persists in securitization and securities financing transactions. - Supervisory guidance on banks’ “step-in risks” to be implemented in 2020; reform of US government–sponsored enterprises stalled while their share of MBS activity rose to 86 percent from 61 percent in 2006. - Case study highlights: - China: - Select NBCI activities expanded by about 100 percent of GDP since 2010. - Bank claims on other financial institutions rose from less than 30 percent of GDP in 2010 to more than 130 percent currently; as a share of total assets, bank claims on nonbank financial institutions doubled over the past decade to 25 percent. - China’s MMF industry: Yu’E Bao assets of about US$200 billion; Chinese MMFs are predominantly CNAV, have maximum weighted average maturity (120 days) twice that of most US and European MMFs, cash holdings declined from about 75 percent in 2013 to less than 50 percent more recently; MMF net assets of a little more than US$500 billion equate to about US$1 trillion of gross asset holdings. - Policymakers have started closing arbitrage avenues, enforcing regulations, and unwinding presumption of sponsor support. - United States—Structured Leveraged Finance: - Leveraged loan outstanding volumes now more than 50 percent above the 2008 peak; leveraged loan market equivalent to about 5 percent of US GDP. - Share of loans rated B+ or below reaccelerated to near-record levels; covenant-lite issuance share increased. - Distribution of leveraged loan exposure now more concentrated among dedicated institutional investors; bank share fell from about 25 percent a decade ago to less than 10 percent now. - Subprime auto-loan ABS: $110 billion of subprime auto loans issued in 2016; stock of subprime auto-loan ABS about $50 billion (0.3 percent of GDP). - European Asset Management: - FSB recommendations address liquidity transformation, leverage, operational risk, and securities lending. - Data gaps impede assessment: composition of fund unit holders, leverage reporting (gross vs net), and limited information on special purpose vehicles outside the regulatory perimeter. - Initiatives underway to improve clarity on beneficial owners and leverage use. - FinTech: - Current NBCI credit intermediation via FinTech remains modest (less than 1 percent of bank loans); FSB found no compelling financial stability risk in present forms. - Monitoring needed where payments companies invest customer float without proper safeguards, or peer-to-peer lending evolves into originate-to-distribute models without skin-in-the-game, and where operational risks could disrupt services. - Consumer protection and financial integrity concerns (AML/CFT) will require attention. ### Conclusions and Policy Takeaways - Two broad conclusions: - Much progress has been made, especially in advanced economies: securitization practices strengthened, repo markets overhauled, MMF industry reformed, and bank–shadow bank interconnectedness reduced. - The job is not done: harmonizing retention rules, further reforming rating agency practices, and unwinding implicit official backstops remain priorities; significant data gaps persist for cross-border interconnectedness, collective investment vehicle vulnerabilities, and risk concentrations. - Ongoing priorities: - Complete implementation of global reform agenda and close remaining loopholes to limit regulatory arbitrage. - Improve data collection and international coordination to monitor NBCI growth in emerging markets. - Remain vigilant to new challenges from structured leveraged finance, asset management risks, FinTech, and the evolving NBCI landscape. *Source: Introduction, 45663-dp1814-shadow-banking - Introduction.* ### Conclusion ### Conclusion ### Key assessment - Technologies stand out in presenting risks and opportunities. - For all the progress that has been made since the global financial crisis, it remains an open-ended challenge to mitigate the risks while preserving the benefits of all forms of credit growth. ### Policy priority - Ensure that NBCI supports productive risk taking and economic growth well into the future. *Source: Conclusion, 45663-dp1814-shadow-banking* --- _Source: https://www.imf.org/-/media/files/publications/dp/2018/45663-dp1814-shadow-banking.pdf_