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Global watchdog says shadow-banking supervision too patchy

[LONDON] Regulators have yet to get a firm handle on the world's US$35 trillion shadow banking sector with supervision and data gathering still too patchy for spotting risks properly, the global Financial Stability Board said on Wednesday.

Banks face tougher rules since the 2007-09 financial crisis, prompting a shift in risks to shadow banking like repurchase agreements, securitisation or pooling of debt, money market funds and securities lending by asset managers.

Policymakers now call the sector market-based financing that can offer alternative funding for the economy, but are still mindful of risks after securitisation helped sow the seeds of the financial crisis.

Shadow banking usually refers to nonbanking firms carrying out services similar to those typically offered by banks.

They are better supervised than in the past but the FSB, which coordinates regulation for the Group of 20 economies (G20), said there are still gaps, with better quality data and improved sharing of data still needed to assess risks.

The FSB, chaired by Bank of England Governor Mark Carney, published its first review of how its rules for strengthening oversight of shadow banks are being implemented.

"More work is needed to ensure that the framework's application is rigorous enough for jurisdictions to comprehensively assess and respond to potential financial stability risks posed by non-bank financial entities, and to support FSB risk assessments and policy discussions," the FSB said. "Gaps in the availability of data were particularly pronounced for non-regulated entities, given that authorities'data collection powers often do not extend to such entities," the FSB said.

The FSB's "narrow" measure of shadow banking published last November, which excludes pension funds and insurers, rose by US$1.1 trillion to US$35 trillion in 2014, or 12 per cent of global financial system assets.

A broader measure estimated shadow banking to be worth US$137 trillion in 2014, or 40 per cent of assets.

Shadow banking in China has seen sharp growth, rising from 2 per cent to 8 per cent of the global total between 2013 and 2014, but the FSB said on Wednesday the country did not agree with the classification of some entities as shadow banks.

"The need for transparent, consistent and well-documented classification is particularly important given the expected use of this information in risk assessments and policy discussions by the FSB," the watchdog said.

While FSB rules are not legally binding, G20 members commit themselves to applying them.

The FSB review made several recommendations: plug data gaps, remove hurdles to cross-border data sharing, and involve all relevant domestic authorities in assessing shadow banking risks.