'Toxic forms of shadow banking' no longer represent a global financial stability risk, says international watchdog

Lucy White
Governor Of The Bank Of England Delivers The Annual Peston Lecture
Carney warned that G20 leaders must not lose sight of the need to reform the banking system (Source: Getty)

The more insidious aspects of the unregulated banking subsector known as “shadow banking” no longer pose a threat to global financial stability, according to international banking watchdog the Financial Services Board (FSB).

Speaking at a press conference today, chair of the FSB and governor of the Bank of England Mark Carney praised the efforts of G20 leaders to reform the shadow banking industry, after its perils were revealed in the financial crisis.

Read more: Carney calls on G20 leaders to continue the push for banking reform as the Financial Stability Board delivers its third annual report

However, he will also pass on warnings to the nations' leaders at the G20 Summit in Hamburg later this week that they must keep their focus on the issue.

“Toxic forms of shadow banking at the centre of the crisis no longer represent a global financial stability risk,” he said.

“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.”

Shadow banking is the activity performed by institutions which are not subject to regulatory oversight, for example hedge funds, or unregulated activities performed by regulated institutions, for example credit default swaps.

And although the shadow banking system has grown, Carney said the toxic elements are much minimised thanks to regulation in areas such as money markets and securitisation.

The FSB may well be giving itself a pat on the back for this, as it was created in the aftermath of the 2007 to 2008 financial crisis in order to coordinate national financial authorities and promote the implementation of financial policy.

Carney said the body will continue to evaluate the effectiveness of policies, while watching for what might cause the next financial upset.

Read more: China told to combat debt problem or face banking crisis

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