Recent Developments in Financial Stability, Macroprudential Arrangements, and Shadow Banking

Ojo, Marianne (2024): Recent Developments in Financial Stability, Macroprudential Arrangements, and Shadow Banking. Published in: Cambridge Scholars Publishers

Abstract

On the 20th December 2023, the Financial Stability Board published revised policy recommendations to address structural vulnerabilities from liquidity mismatch in open ended funds (OEFs). Main points which were highlighted in relation to new recommendations include the following:

- Revised FSB recommendations and IOSCO Guidance on Anti Dilution Liquidity Management Tools (LMTs), which are aimed at achieving significant strengthening of liquidity management by open ended funds (OEFs), compared to current practices.

Despite Basel III’s efforts to address capital and liquidity requirements, will the risks linked to regulatory arbitrage increase as a result of Basel III’s more stringent capital and liquidity rules?

Apart from Basel III reforms which are geared toward greater facilitation of financial stability on a macroprudential basis, further efforts and initiatives aimed at mitigating systemic risks, hence fostering financial stability, have been promulgated through the establishment of the De Larosiere Group, the ESRB, and a working group comprising of “international standard setters and authorities responsible for the translation of G20 commitments into standards.”

This paper aims to investigate the impact of Basel III on shadow banking and its facilitation of regulatory arbitrage as well as consider the response of various jurisdictions and standard setting bodies to aims and initiatives aimed at improving their macroprudential frameworks. Furthermore, it will also aim to illustrate why immense work is still required at European level as regards efforts to address systemic risks on a macroprudential basis. This being the case in spite of significant efforts and steps that have been taken to address the macroprudential framework. In so doing, the paper will also attempt to address how coordination within the macroprudential framework as well as between microprudential and macroprudential supervision could be enhanced.

• Item Type: MPRA Paper
• Language: English
• Keywords: Macroprudential arrangements; financial stability; interest rates; liquidity management tools; open ended funds
• Subjects: E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects; E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E60 - General; G - Financial Economics > G2 - Financial Institutions and Services; G - Financial Economics > G2 - Financial Institutions and Services > G20 - General; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation

References

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 (see appendix)

Financial Stability Board (2023). “FSB and IOSCO Publish Policies to Address Vulnerabilities From Liquidity Mismatch in Open Ended Funds” https://www.fsb.org/2023/12/fsb-and-iosco-publish-policies-to-address-vulnerabilities-from-liquidity-mismatch-in-open-ended-funds/

Financial Stability Board (2023). “Rising Interest Rate Environment Led to A Decline in Non Bank Financial Intermediation in 2022 https://www.fsb.org/2023/12/rising-interest-rate-environment-led-to-a-decline-in-non-bank-financial-intermediation-in-2022/

Financial Stability Board (2023). “FSB Outlines Work to Further Increase the Resolvability of Banks’ Central Counter Parties and Insurers https://www.fsb.org/2023/12/fsb-outlines-work-to-further-increase-the-resolvability-of-banks-central-counterparties-and-insurers/

Financial Stability Board (2023). “ FSB Publishes Toolkit for Enhancing Third Party Risk Management and Oversight” https://www.fsb.org/2023/12/fsb-publishes-toolkit-for-enhancing-third-party-risk-management-and-oversight/

Financial Stability Board (2023). “FSB Assesses Risks of Multi Function Crypto Asset Intermediaries” https://www.fsb.org/2023/11/fsb-assesses-risks-of-multi-function-crypto-asset-intermediaries/