Enlightenment From International Practice Of Shadow Banking Regulation

Paul McCulley, the Executive Director of the United States Pacific Investment Co.Ltd, named “shadow banking” firstly in the Fed’s Annual Conference as a descriptionof the large derivatives market outside supervision in2007. More and more countriesresearch shadow banking system, whose supervision issues have been focused bymany international financial institutions with the outbreak of the financial crisis.In April of2011, Financial Stability Board defined “shadow banking” in its note:Shadow Banking: Scoping the Issues as “credit intermediation involving entities andactivities outside the regular banking system” and “a system of credit intermediationthat involves entities and activities outside the regular banking system, and raises i)systemic risk concerns, and/or ii) regulatory arbitrage concerns” as the generalizedconcept. FSB then began the international regulation practice with other internationalfinancial institutions after the definition of shadow banking.A series of regulation practice has achieved positive results and influences deeplyon regulation practice of authorities. This paper analysis conceptions, risks, regulationpractice, regulation influence on China’s practice of shadow banking, and bringframework of recommendations and operation methods. The framework of this paperis as follows:The main content of Chapter1is a brief summary of shadow banking, including itsconception, history, characteristics, sources of risks and classification. This briefintroduction is meant to concentrate on the main points, which are the risks andregulation methods of shadow banking.After introduction of the basic framework of shadow banking system, Chapter2involves four typical forms of shadow banking system which are Securitization,Money Market Funds (MMFs), Repos and Credit Derivatives; meanwhile, the risks ofshadow banking system, including systemic risks, management risks, liquidity risksand moral risks, are also analyzed separately in this part.Focusing on the risks from shadow banking system, the regulation practice and methods of international financial regulation institutions are the main contents ofChapter3, especially the regulation methods of BCBS and FSB. The internationalregulation practice on shadow banking of FSB is main body in this chapter. FSB hasbuilt five work group focusing on the regulation practice of banks’ interactions withshadow banking entities; MMFs; Other shadow banking entities; Securitisation; andsecurities lending and Repos. In this chapter, shadow banking regulations of BCBSand FSB are concluded and analyzed according to the forms of risks. An assessmentof FSB regulation practice is the last part of Chapter3.For the whole paper Chapter4is the last part, in which the influence ofinternational regulation practice on our country is mainly discussed. Firstly, thedefinition of shadow banking of China is introduced given the special condition: TheFSB definition has to add the area of “less regulation” in China. Secondly, the authorintroduces the typical forms of shadow banking in China, and assesses the risks ofeach form. Finally, several inspirations are listed, mainly from the aspect offramework, systems and modes of regulation. The author hopes that China couldsubstantially involve in the regulation making process of international financialregulation.