Moving beyond the shadow banking concept

A concept that emerged from the 2007-08 financial crisis, shadow banking has been a focus of regulatory attention for almost a decade. The need for a common definition has spawned a debate over terminology that mirrors the challenges involved in finding a catch-all term to cover such a wide spectrum of situations. If some commentators today prefer expressions such as “market-based finance” or “non-bank finance” that avoid the original term’s pejorative connotations, it is because there has been a paradigm shift since the crisis. After addressing most areas of “shadow banking”, from the transparency of repo and securities lending transactions to money market fund (MMF) reforms and securitisation rules, regulators are now turning to consider the effectiveness of regulation and are concentrating on identifying persistent areas of risk as well as emerging risks. Extending beyond the narrow definition of shadow banking, recent efforts to make the financial system more robust, as illustrated by the analysis of vulnerabilities in the asset management sector, highlight the need for a holistic risk-based approach that considers different sectors and areas of activity as a whole. How does this risk based approach play out in practice? And what are the main related challenges?