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Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions

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Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions

Proposed High-Level Framework and Specific Methodologies

FSB,

15 min read
10 take-aways
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What's inside?

Shadow banking’s interconnectivity with the global financial system merits regulators’ careful consideration.

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Editorial Rating

7

Qualities

  • Innovative

Recommendation

In this report, the Financial Stability Board (FSB) – consisting of the G20’s central bankers and finance ministries – explains how to identify global systemically important financial institutions that are neither banks nor insurance companies. The report’s imposing title belies its straightforward and well-informed examination of “shadow banking” and makes recondite subject matter relatively accessible. Because the Board’s report is consultative in nature and open to public comment, it poses additional questions as much to gauge regulators’ understanding of the issues as to generate additional critical thinking about them. getAbstract commends the FSB’s work, despite its wonkish tone, to regulators, policy makers, economists, financial practitioners and anyone with an interest in the world’s financial plumbing and its inherent risks.

Summary

Out of the Shadows

Financial disintermediation assumes various shapes and sizes: Nonbank, noninsurer (NBNI) financial institutions – commonly referred to as “shadow banks” – now play critical roles in the economic and financial system. Because of their wide scope and numerous interrelationships within the financial sector, these organizations could wreak widespread havoc should one of them encounter problems that result in an unplanned or haphazard unwinding. The way that financial contagion spreads varies by sector, but generally it can happen in three ways:

  1. “Exposures” – The counterparties that a shadow bank or NBNI conducts business with assume a direct risk of loss if it fails. The greater the number of counterparties an NBNI has, the more risk to the system.
  2. “Asset liquidation” – A struggling NBNI would have to sell assets, forcing prices down and unsettling trading and funding markets. This would lead to losses among other market participants. Such liquidation could have global impacts, and leverage would intensify those effects.
  3. “Critical function or service”

About the Author

The Financial Stability Board globally coordinates national financial authorities and international bodies to promote effective financial regulatory and supervisory policies.

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