Bloomberg reports that the size of the shadow banking system, which includes the activities of money market funds, monoline insurers and off- balance sheet investment vehicles, 'can create systemic risks' and 'amplify market reactions when market liquidity is scarce', the Financial Stability Board said in a report, which utilized more data than last year’s probe into the sector.
'Appropriate monitoring and regulatory frameworks for the shadow banking system needs to be in place to mitigate the build-up of risks', the FSB said in the report published on its website.
While watchdogs have reined in excessive risk-taking by banks in the wake of the collapse of Lehman Brothers Holdings Inc. in 2008, they are concerned that lenders might use shadow banking to evade the clampdown. Michel Barnier, the European Union’s financial services chief, is planning to target money market funds in a first wave of rules for shadow banks next year.
The FSB, a global financial policy group comprised of regulators and central bankers, found that shadow banking grew by $41 trillion between 2002 and 2011. The share of activity based in the U.S. has declined from 44% in 2005 to 35% in 2011, moving to the U.K. and the rest of Europe.
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