“If it looks like a duck, quacks like a duck, and acts as a duck, then it is a duck – or so the saying goes. But what about an institution that looks like a bank and acts like a bank? Often it is not a bank – it is a shadow bank” (Laura E. Kodres, Finance & Development, June 2013). The term “shadow bank” was coined by economist Paul McCulley where he referred to nonbank financial institutions that engaged in what economists call “maturity transformation.” They raise short-term funds in the money market and use those funds to buy assets with longer-term maturities. But because they are not subject to traditional bank regulation, they cannot avail of emergency assistance from the Federal Reserve and do not have traditional deposits covered by insurance – they are thus “in the shadow” (ibid.).
By acting as a financial intermediary outside the banking system, shadow banking has attracted patronage by enabling underbanked sectors to access alternate credit and investment solutions with higher yields. Due to lack of regulations on shadow banking activities including simpler on-boarding procedures and favorable capital requirements, an increasing number of customers are finding value in this alternate banking system. Nonetheless, it is difficult to estimate the size of the shadow banking industry since there is a lack of unified guidelines covering the scope and definition of these activities.
What is clear is that shadow banking also has its fault lines such as a general lack of transparency that hid amounts of leverage and mismatch between long-term credit and short-term funding, opaque governance and ownership structures, little regulatory oversight, no-loss absorbing capital or cash for redemptions, and lack of access to formal liquidity support, all of which can pose risks to the financial system.
The Financial Stability Board (FSB), an international organization established to coordinate the work of financial authorities, has noted and monitored the evolution of shadow banking activities and the risks attendant thereto. It has defined shadow banking as “credit intermediation involving entities and activities outside the regular banking system.” It has formulated a strategy to deal with shadow banking which, in general terms, would refer to, first, the creation of a monitoring framework to track financial sector developments outside the banking system and, second, the development of policies to strengthen oversight and regulation of shadow banking system.
In this regard, then Bangko Sentral Governor Amando M. Tetangco Jr. in his statement during the FSB Plenary Meeting in September 2014 in Cairus, Australia stated as follows: “RCGA (Regional Consultative Group for Asia) members welcome a shadow banking policy framework which strikes a balance between ensuring financial stability and promoting economic and financial development in Asia. The non-bank sector may be relatively small in Asia, but it is recognized that it does have a role to play in mobilizing and redeploying economic savings, deepening financial markets and promoting financial inclusion. This regional dimension should be considered in future global shadow banking work, taking into account the unique features of financial markets and roles played by non-bank Fls in Asia.”
With the recent amendments of the Bangko Sentral charter introduced by Republic Act No. 11211, the Bangko Sentral would have more capability and latitude to come out with a stronger policy framework on shadow banking. The Bangko Sentral has now been given clear mandate to promote financial stability and to cover within its supervisory jurisdiction, in addition to banks, other institutions engaged in credit granting businesses. Protection to the consumers and to the financial system is understood to be included in the agenda of this mandate.
The above comments are the personal views of the writer. His email address is [email protected]