What are the implications of the growing ‘shadow banking’ sector?

The world’s shadow banking sector was worth $36 trillion (£25 trillion) in 2014.

 

This is according to the Global Shadow Banking Monitoring Report 2015 from the Financial Stability Board (FSB), which reveals that the industry grew significantly in value over the 12 months from 2013 to 2014, increasing by around $1.1 trillion during this time.

 

But exactly what role is the shadow banking sector playing in the global economy? And what does this mean for recruitment in the financial services industry?

What is shadow banking?

In simple terms, the shadow banking system is a group of financial intermediaries who are involved in creating credit across the globe, but are not subject to regulatory oversight.

 

 

At the Brisbane Summit in 2014, G20 leaders committed to improving the global shadow banking sector, which subsequently led the FSB to add a new activity-based economic function into its annual monitoring report aimed specifically at the areas of the non-bank financial sector that may be at greatest risk from shadow banking intermediaries.

 

Daniel Tarullo, chair of the FSB Standing Committee on Supervisory and Regulatory Cooperation, explained: “The extension of the scope of the securities financing regulatory haircut floor framework to cover transactions between non-banks will limit regulatory arbitrage and prevent the build-up of excessive leverage and liquidity mismatch in the non-bank financial system.”

How is this changing the financial industry?

What other implications is shadow banking presenting to the wider financial industry?

 

As it operates without formal regulation, the risks associated with the shadow banking sector are abundant, and as penalties for financial compliance breaches increase, this makes it all the more important for banks to be operating within standard industry guidelines.

 

The FSB reports that progress has been made over the past 12 months to strengthen oversight and regulation in the shadow banking sector itself, as without it, financial anarchy could ensue.

 

In particular, regulators are focusing on how the collection of financial data can be improved to provide greater benefits to bankers. Big data is set to continue to be a key trend across a range of industries throughout 2016 and could influence the way the shadow banking sector is managed in the future.

 

Shadow banking practices are constantly evolving, but the FSB and other prominent financial bodies are working to improve the regulation of the sector, in an attempt to ensure the intermediaries involved can work in harmony with traditional bankers over the coming months and years.

 

For instance, the FSB is involved in mitigating risks in the relationships between banks and shadow banking entities, alongside improving transparency and security in the financial world as a whole.

 

What’s more, the organisation is committed to dampening economic fluctuations and increasing security during such times, as well as assessing the risks imposed by other shadow banking entities.

 

Commenting on the growth of the shadow banking sector, chair of the FSB Mark Carney stated: “Non-bank financing is a welcome additional source of credit to the real economy.

 

“The FSB’s efforts to transform shadow banking into resilient market-based finance, through enhanced vigilance and mitigating financial stability risks, will help facilitate sustainable economic growth.”

What does this mean for compliance recruitment?

As the growth of the shadow banking sector shows no signs of slowing anytime soon, compliance specialists could see an increase in job opportunities that require their expertise, particularly as there is also a growing focus on regulation in the sector.

 

Shadow banking brings with it many risks, meaning any expertise on compliance is highly coveted by banks and financial regulators when it comes to policing the industry.

 

Our Market Reports combine our review of the prevailing conditions in the compliance recruitment market together with the results of our 2015 employer survey. We look to analyse and discuss the latest trends in the compliance recruitment market.