Assessing Shadow Banking – Non-Bank Financial Intermediation in Europe

Abstract

ESRBAssessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 4 Similarly, in a second step the FSB states: "authorities should narrow the focus for policy purposes to the subset of nonbank credit intermediation where there are (i) developments that increase systemic risk (in particular maturity/liquidity transformation, imperfect credit risk transfer and leverage), and (ii) indications of regulatory arbitrage that is undermining the benefits of financial regulation." (FSB, 2011b) ESRB Assessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 9 See the BCBS consultative document on the identification and measurement of step-in risk (BCBS, 2015), which raises issues of identification of unconsolidated entities to which a bank may provide financial support. The BCBS document proposes potential approaches to reflect step-in risk in prudential measures. See also, for example, Cetorelli ( 2014) and Claessens and Ratnovski (2014). ESRB Assessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 12 See, for example, FSB (2011b), p. 4.13These metrics overlap to some extent with those suggested by the FSB in its Workstream 3 on other shadow banking entities, as well as with those mentioned in the FSB"s global shadow banking monitoring reports. In line with this FSB approach, the ESRB also takes into account credit intermediation and the interconnectedness with the banking system. However, whereas the interconnectedness is included in a separate section in the FSB reports, the ESRB decided to classify it as an additional indicator category. ESRBAssessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 14 Academic concerns about the interactions between funding and market liquidity (see, for example, Brunnermeier and Pedersen, 2009) were emphasised more recently by the Bank of England (see, for example, Box 4 in the Bank of England"s December 2014 Financial Stability Report). 15 Pozsar (2014) calls for "Flow of Collateral, Flow of Risk, Flow of Eurodollar satellite accounts to supplement the Financial Accounts". 16 In order to assess risks in the investment fund and market-making sectors, the ESRB conducted a data collection exercise covering 274 EU asset management firms and 1,668 fixed-income investment funds in 2015.17Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012. ESRB Assessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 ESRB Assessing shadow bankingnon-bank financial intermediation in Europe No 10/ July 2016 Entity-based mapping of shadow banking in Europe 9 ESRB Assessing shadow bankingnon-bank financial intermediation in Europe No

Mapping exposures of EU banks to the global shadow banking system

“…The data underpinning our analysis show the domicile of the shadow banking entity. As noted by Grillet-Aubert et al (2016), the "country of domicile is important in determining the geographic locus of potential supervisory measures". However, such geographic data are based on a first counterparty basis and may not reflect the ultimate risk bearers within the shadow banking entity.…”

“…A growing body of academic evidence suggests that some of the linkages between banks and nonbank financial institutions may be associated with regulatory arbitrage opportunities (Kashyap, Stein, andHanson, 2010, Adrian andAshcraft, 2012, Acharya, Schnabl and2 At the global level, the Financial Stability Board (FSB) has coordinated efforts in improving data coverage for monitoring developments within the shadow banking system (see, for example, FSB, 2011FSB, , 2015FSB, and 2020. At the European level, the European Systemic Risk Board (ESRB) has focused on monitoring potential financial stability risks, including those risks and negative externalities posed by entities and activities within the shadow banking system (see ESRB 2016ESRB , 2017ESRB , 2018ESRB , 2019ESRB , 2020aand Grillet-Aubert et al 2016).…”

“…Using a range of analytical approaches, we document the exposures of EU banks to different types of shadow banking entities at a global level and consider which are the most relevant for systemic risk monitoring. In this way, our paper is related to a strand of literature focused on assessing the financial stability implications of shadow banking activities (see, for example, FSB 2011; Adrian and Ashcraft 2012; Adrian, Ashcraft and Cetorelli 2013;Adrian 2014;Claessens and Ratnovski 2014;Grillet-Aubert et al 2016;Portes 2018;ESRB 2019, ESRB 2020a.…”