Global Financial Watchdog Calls for Increased Regulation of Shadow Banking Sector
Global Financial Watchdog Calls for More Regulation of Shadow Banking Sector
In a recent letter to finance ministers and central bank governors, Financial Stability Board Chair Klaas Knot emphasized the need for increased regulation in the “shadow banking” sector. Knot highlighted the potential systemic risks posed by non-bank financial institutions (NBFIs), such as hedge funds and private credit providers, which operate outside the traditional banking system.
Recent incidents of market stress and liquidity strains have underscored the vulnerabilities within the shadow banking sector, according to Knot. The FSB data shows that NBFIs held a significant amount of financial assets globally, totaling $218 trillion in 2022.
To address these risks, Knot urged for the finalization of NBFI reforms and emphasized the importance of timely implementation. The FSB plans to publish a consultation report with proposed policy solutions by the end of the year.
Regulators on both sides of the Atlantic have echoed Knot’s concerns, with European Banking Authority Chairman Jose Manuel Campa considering reporting requirements for nonbank financial institutions. Michael Hsu, acting head of the Office of the Comptroller of the Currency, also highlighted the need for greater oversight of NBFIs to prevent lower-quality and higher-risk lending practices.
As regulators focus more on the NBFI sector, traditional financial institutions are adapting to the changing landscape. Open banking initiatives are transforming financial services, with a market-driven approach driving innovation in account opening and bundled offerings.
The call for increased regulation in the shadow banking sector reflects a growing recognition of the need to address systemic risks and vulnerabilities in the global financial system. As regulators work towards implementing reforms, the financial industry is poised for significant changes in the way non-bank financial institutions are monitored and regulated.
