Deputy Governor of Financial Regulation, Cyril Roux, highlights need for regulation of the shadow banking system

• Central Bank of Ireland at forefront internationally in examining shadow banking
• Significant challenges remain in monitoring shadow banking globally
• Risks must be addressed by regulation at international level

In a public dialogue at the European Institute of Financial Regulation with Gerard Rameix, Chair of the AMF, the French securities and markets authority, Deputy Governor of Financial Regulation, Cyril Roux, today outlined the Central Bank of Ireland’s work in the area of shadow banking and noted that while progress has been made to date towards regulating shadow banking at international level, significant issues remain.

Welcoming the Financial Stability Board’s (FSB) monitoring framework in the area of shadow banking, Mr Roux stressed the importance of capturing all elements of shadow banking in the non-bank financial sector in this exercise.

Measuring shadow banking as an economic function at a global level is complex and while the FSB’s approach seeks to capture the non-bank financial sector in order to directly monitor shadow banking globally, it must also formulate standards for regulators in order to address systemic risks associated with shadow banking.

Deputy Governor Roux stated that the “identification and monitoring of systemic risk from market-based finance is crucially important, but methodologies and data availability are at an early stage of development, especially when compared to the more traditional  banking sector. The FSB’s work in this area has been a welcome addition to the debate, particularly  in relation to the economic functions. These are helping to refine both the statistical exercise of measuring total shadow banking and the risk assessment further by categorising entities based on the specific activities they undertake which could threaten financial stability. Given the international nature of shadow banking, the regulatory reform debate must continue to take place at an international level.”

In addition to the difficulties associated with gathering consolidated data internationally in this area, consistent interpretation of guidelines and cross-border mapping of risks must continue to be addressed.

As the FSB has acknowledged, its framework must continue to be assessed and updated to ensure the continued development of risk assessment. The Central Bank of Ireland continues to play a very active role in this work internationally on operationalising the FSB recommendations on asset management structural vulnerabilities. In addition, the Central Bank of Ireland is working on methodologies for stress testing of individual funds which could then be aggregated by public authorities to piece together a systemic perspective on the activities of (and potential risks from) these entities.