The Financial Stability Board (FSB) has published its latest recommendations for strengthening the oversight and regulation of the so-called shadow banking system, which has emerged alongside the traditional, regulated bank sector.

The FSB says that its efforts in this area are designed to address the risks to financial stability that can emerge outside the regular banking system, without unnecessarily inhibiting sustainable financing models that do not pose these kinds of risks.

Its recommendations focus on five areas of potential systemic risk: the risk of spill-over between the regular banking system and the shadow banking system; the susceptibility of money market funds to “runs”; better aligning the incentives associated with securitization; dampening risks stemming from transactions, such as repos and securities lending, that may exacerbate funding strains in times of market stress; and, mitigating systemic risks posed by other shadow banking entities and activities.

It also provides a process for monitoring the shadow banking system so that any rapidly growing new activities that pose bank-like risks can be identified early and addressed.

“The policy recommendations issued by the FSB today address important sources of maturity transformation and leverage in shadow banking,” said Mark Carney, chairman of the FSB.

“Implementation of these recommendations will be an essential first step towards achieving our aim of transforming shadow banking into market-based financing conducted on a sound basis. This, in turn, will help diversify the sources of financing of our economies in a sustainable way and contribute to the G20’s ultimate objective of strong, sustainable and balanced growth,” he added.

Daniel Tarullo, chairman of the FSB standing committee on supervisory and regulatory cooperation stated that, “The policy framework for strengthening oversight and regulation of shadow banking entities will help authorities to better identify and address financial stability risks from shadow banking. This is especially important as tighter regulations on banks and other traditional market participants that are coming into effect may incentivise some risky activities to move to less tightly regulated sectors.”