Shadow Banking in Advanced and Emerging Market Economies: Need for Better Regulation
45 Pages Posted: 7 Jun 2016
Date Written: March 12, 2016
The ongoing financial crisis that started in the summer of 2007 has been a crisis not only of traditional banks but also of shadow banks. In response to the crisis, the G20 created the Financial Stability Board (FSB) – successor of the Financial Stability Forum established by the G7 in 1999 – in 2009 to coordinate at the international level the work of national financial authorities and international standard-setting bodies so as to promote international financial stability. Since then, the FSB has identified a number of priority reform areas with shadow banking being one of them. The FSB describes the shadow banking system broadly as “credit intermediation involving entities and activities outside the regular banking system” or nonbank credit intermediation in short. Shadow banking is important because it might create systemic risks which may lead to a reduction in credit availability with the potential for adversely affecting the real economy. With this in mind and focusing on the FSB member countries, we compare and contrast the shadow banking systems in the Advanced Economies (AE) and Emerging Market Economies (EME), document what have been accomplished so far at the regulatory front, and critically analyse the ongoing reform attempts and proposals. In our comparison, we pay special attention to three economies, namely, the United States (US), China and India, as examples of different forms the shadow banking systems may take. In the case of the US, we mainly focus on the US repo market because of the fundamental role it plays in the US shadow banking system.
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