BY Richard Summerfield
The ‘shadow banking’ system, which sees unregulated financial institutions offering lending and other financial activities under unregulated conditions, has been a major issue in the financial services space for many years, and is believed to have been a key catalyst for the financial crisis which began a decade ago.
However, according to Mark Carney, governor of the Bank of England and outgoing chairman of the Financial Stability Board (FSB), shadow banking, which has remained a key threat to global financial stability, has finally been tamed thanks to a series of fundamental reforms across the financial services space. Mr Carney suggests the world’s biggest banks are stronger, misconduct is being tackled, and the toxic forms of shadow banking are no longer a threat to the global economy. Though the shadow banking system has grown in recent years, according to Mr Carney, the industry’s more toxic elements have been marginalised by increased regulation in areas such as money markets and securitisation.
At a press conference on Monday, Mr Carney said that though shadow banking has been largely tamed it will continue to represent an ever present and changing threat. “Toxic forms of shadow banking at the centre of the crisis no longer represent a global financial stability risk. The remaining shadow banking activities are now subject to policy measures to reduce their risk and reinforce their benefit allowing for more diverse and resilient forms of market based finance. Shadow banking activities will inevitably evolve, so FSB member authorities must continue to strengthen their surveillance, data sharing and analysis in order to support the risk assessments and any future regulatory response that may be required,” he said.
Indeed, regulators must remain vigilant in the coming years if the threats posed by shadow banking are to be kept in check. The spectre of ‘reform fatigue’ must be fought off, says Mr Carney, as the next round of banking reform, including increased transparency regarding the over-the-counter derivatives markets, kicks in. Mr Carney also called for the next-step Basel III banking reforms to be completed “urgently and then implemented faithfully”.
Though there is more work to be done, significant steps have been taken to reform global banking in the 10 years since the crisis began. Banks are stronger, have better liquidity and are subject to greater and more stringent regulation. Shadow banking is still an issue but its influence has waned.