Ahmed Al-Darwish, PhD* Director of Financial Sector Development - - PowerPoint PPT Presentation

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Ahmed Al-Darwish, PhD* Director of Financial Sector Development - - PowerPoint PPT Presentation

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SAMA Quarterly Workshop, Riyadh Ahmed Al-Darwish, PhD* Director of Financial Sector Development Department, SAMA March 5, 2015 * aaldarwish@sama.gov.sa Global Perspectives 2 Financial Sector Development Department, SAMA, March 5, 2015 Global

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Ahmed Al-Darwish, PhD*

Director of Financial Sector Development Department, SAMA

March 5, 2015

* aaldarwish@sama.gov.sa

SAMA Quarterly Workshop, Riyadh

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Financial Sector Development Department, SAMA, March 5, 2015

Global Perspectives

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Financial Sector Development Department, SAMA, March 5, 2015

Global Perspectives

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Financial Sector Development Department, SAMA, March 5, 2015

Global Perspectives

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Financial Sector Development Department, SAMA, March 5, 2015

Global Perspectives

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Financial Sector Development Department, SAMA, March 5, 2015

Global Perspectives

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Financial Sector Development Department, SAMA, March 5, 2015

Global Perspectives

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Outlines

  • Definitions & Measures
  • Size and Growth of Shadow Bank(ing)
  • Factors and drivers of SB growth
  • Shadow banking and financial stability
  • Regulations & some countries’ experiences to

contain SB’s risks.

  • Conclusion and Q&A

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Financial Sector Development Department, SAMA, March 5, 2015

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Definitions

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Financial Sector Development Department, SAMA, March 5, 2015

Activities Entities …or both

Unregulated or lightly regulated bank-like intermediation Bank-like entities without government backup or access to central bank liquidity Credit intermediation involving entities and activities outside the regular banking system

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…& Measures

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Financial Sector Development Department, SAMA, March 5, 2015

3 ways to measure SB FSB

Flow

  • f

Funds

IMF

(Non-core liabilities)

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…& Measures

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Financial Sector Development Department, SAMA, March 5, 2015

Source: GFSR, Oct 2014, IMF

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…& Measures ( Flow of Funds)

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Financial Sector Development Department, SAMA, March 5, 2015

Source: GFSR, Oct 2014, IMF

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…& Measures (FSB)

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Financial Sector Development Department, SAMA, March 5, 2015

Source: GFSR, Oct 2014, IMF

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…& Measures (IMF)

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Financial Sector Development Department, SAMA, March 5, 2015

Source: GFSR, Oct 2014, IMF

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…& Measures

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Financial Sector Development Department, SAMA, March 5, 2015

Banks

Deposits

Loans

Investors/ Lenders Borrowers

Source: GFSR, Oct 2014, IMF

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Some Specific Risks of Shadow Banking

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Financial Sector Development Department, SAMA, March 5, 2015

Such risk is usually greater in SB, due to absence of formal backstops

  • r prudential

standards During stress periods, Investors tend to retrench and flee to quality and seek more transparency In good times, shadow banks may contribute substantially to asset price bubbles, as less- regulated entities

Run Risk

Opacity & (de-)Leverage

Spillovers

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Some Specific Risks of Shadow Banking

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Financial Sector Development Department, SAMA, March 5, 2015

BUT, Is Shadow Banking a bad thing?

  • 1. SB can complement traditional

banking by expanding access to credit

  • 2. Support market liquidity
  • 3. Help in maturity transformation
  • 4. …Risk-Sharing
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Outlines

  • Definitions & Measures
  • Size and Growth of Shadow Bank(ing)
  • Factors and drivers of SB growth
  • Shadow banking and financial stability
  • Regulations & some countries’ experiences to

contain SB’s risks.

  • Saudi Arabia’s Case: Highlights
  • Conclusion and Q&A

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Financial Sector Development Department, SAMA, March 5, 2015

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Size and Growth of Shadow Bank(ing)

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Financial Sector Development Department, SAMA, March 5, 2015

Shadow Banking Growth (Percent of GDP)

Source: GFSR, Oct 2014, IMF

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Size and Growth of Shadow Bank(ing)

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Financial Sector Development Department, SAMA, March 5, 2015

Shadow Banking Growth (Percent of Banking Assets)

Source: GFSR, Oct 2014, IMF

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Size and Growth of Shadow Bank(ing)

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Financial Sector Development Department, SAMA, March 5, 2015

Breakdown by Subsector (Percent of entities’ financial assets)

Source: GFSR, Oct 2014, IMF

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Outlines

  • Definitions & Measures
  • Size and Growth of Shadow Bank(ing)
  • Factors and drivers of SB growth
  • Shadow banking and financial stability
  • Regulations & some countries’ experiences to

contain SB’s risks.

  • Saudi Arabia’s Case: Highlights
  • Conclusion and Q&A

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Financial Sector Development Department, SAMA, March 5, 2015

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Key Drivers of SB Growth

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Financial Sector Development Department, SAMA, March 5, 2015

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Outlines

  • Definitions & Measures
  • Size and Growth of Shadow Bank(ing)
  • Factors and drivers of SB growth
  • Shadow banking and financial stability
  • Regulations & some countries’ experiences to

contain SB’s risks.

  • Saudi Arabia’s Case: Highlights
  • Conclusion and Q&A

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Financial Sector Development Department, SAMA, March 5, 2015

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Shadow Banking and Financial Stability

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Financial Sector Development Department, SAMA, March 5, 2015

  • How big these entities are

Size

  • Based on assets are of long or short

duration

Maturity Risk

  • Based on assets are liquid and easy to

trade

Liquidity Risk

  • Based on share of loans assets that

carry substantial credit risk

Credit Risk

  • Total assets to equity

Leverage

  • How these entities are exposed to banks

through assets holdings or liabilities

Interconnectedness

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Shadow Banking and Financial Stability

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Financial Sector Development Department, SAMA, March 5, 2015

Shadow Banking Risks in the EU

Source: GFSR, Oct 2014, IMF

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Shadow Banking and Financial Stability

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Financial Sector Development Department, SAMA, March 5, 2015

Shadow Banking Risks in the United States

Source: GFSR, Oct 2014, IMF

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Shadow Banking and Financial Stability

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Financial Sector Development Department, SAMA, March 5, 2015

Shadow Banking Risks in Japan

Source: GFSR, Oct 2014, IMF

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Outlines

  • Definitions & Measures
  • Size and Growth of Shadow Bank(ing)
  • Factors and drivers of SB growth
  • Shadow banking and financial stability
  • Regulations & some countries’ experiences to

contain SB’s risks.

  • Saudi Arabia’s Case: Highlights
  • Conclusion and Q&A

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Financial Sector Development Department, SAMA, March 5, 2015

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Regulations & SB’s Risks.

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Financial Sector Development Department, SAMA, March 5, 2015

Recently, the IMF has pointed out that Regulators have four toolkits at their disposal to address financial stability risks related to shadow banking:

  • 1. They may impose regulations on shadow banks or

address risks indirectly by targeting banks’ exposures to shadow banks.

  • 2. They may address the underlying causes of the growth
  • f shadow banking.
  • 3. They, may, under certain conditions, extend the public

safety net to (systemically) important shadow banking markets or entities.

  • 4. They may change certain features of bankruptcy laws.
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Regulations & SB’s Risks.

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Financial Sector Development Department, SAMA, March 5, 2015

To handle the potential risks of shadow banking, the IMF suggests adopting the following framework:

Source: GFSR, Oct 2014, IMF

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Some Countries’ Experiences/ Efforts to handle SB’s Risks

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Financial Sector Development Department, SAMA, March 5, 2015

In the USA:

  • In times of stress, all MMFs may impose liquidity fees.
  • Securitized assets to be included in banks’ risk-weighted assets.
  • Extending the perimeter of prudential regulation and supervision

to systemically important non-banks. In Europe:

  • New regulations to be imposed on MMFs including a capital

buffer of 3 %, diversification of investment, liquidity, and the eligibility of assets.

  • More measures regarding the transparency of banks’ investments
  • Central repositories have been set up to collect data on

derivatives.

  • Beginning in 2014, banks are required to report exposures

related to SB.

  • The definition of “credit institution” is being reviewed with a

view to possible extension of the prudential regulatory perimeter.

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Outlines

  • Definitions & Measures
  • Size and Growth of Shadow Bank(ing)
  • Factors and drivers of SB growth
  • Shadow banking and financial stability
  • Regulations & some countries’ experiences to

contain SB’s risks.

  • Saudi Arabia’s Case: Highlights
  • Conclusion and Q&A

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Financial Sector Development Department, SAMA, March 5, 2015

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Saudi Arabia’s Case: Highlights

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Financial Sector Development Department, SAMA, March 5, 2015

Banks 69% Finance & Leasing Companies 7% SCIs 17% Investment Funds 7% Individuals* 0%

SAUDI ARABIA: SHARE OF CREDIT PROVIDERS

(AS OF JUNE 2014)

Source: SAMA, CMA

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Saudi Arabia’s Case: Highlights

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Financial Sector Development Department, SAMA, March 5, 2015

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 80.0 2010 2011 2012 2013 2014

Growth of Credit By Providers

Banks Finance & Leasing Companies SCIs Investment Funds

Source: SAMA, CMA

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Saudi Arabia’s Case: Highlights

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Financial Sector Development Department, SAMA, March 5, 2015

Consumer Commercial Real Estate Finance Companies Shares & Bonds Money Market Real Estate Investment Funds

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Saudi Arabia’s Case: Highlights

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Financial Sector Development Department, SAMA, March 5, 2015

Consumer 68% Commercial 18% Real Estate 14%

Credit by Finance Companies

(June 2014)

Source: SAMA, CMA

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Saudi Arabia’s Case: Highlights

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Financial Sector Development Department, SAMA, March 5, 2015

Equity Funds 33% Bonds Funds 5% Money Market 56% Other Funds 2% Real Estate Funds

Assets of Investment Funds By Type (June 2014)

Total Assets of Investment Funds: SAR 115,917 Millions

Source: SAMA, CMA

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Conclusions

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Financial Sector Development Department, SAMA, March 5, 2015

  • Data accuracy is always an issue for shadow banking analysis

and measurements.

  • Although the IOs have provided definitions for shadow banking,

there is a gray area where countries can not identify and differentiate between entities and activities.

  • Country’s circumstances need to be taken into account when

defining the shadow banking. As some countries have different ways of defining intermediary services and based on the systemic risks they impose.

  • Constraining the SB might not always be a good solution, as

they do have positive impacts on the economy which need to be weighted against possible risks.

  • Drivers of shadow banking are not always known and there

might be other factors behind those identified in the literature. Take for example, the unavailability of Sharia-compliant products through the regular financial system.

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Thank You

Ahmed Al-Darwish, PhD

aaldarwish@sama.gov.sa

Director of Financial Sector Development Department, SAMA, March 5, 2015

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Shadow Banking