Bank of Russia-AFI Conference on Financial Inclusion and Shadow Banking

The conference participants — representatives of foreign regulatory authorities, international financial standard setting institutes, professional associations, and market players from 25 countries — gathered to discuss the issues of increasing financial inclusion and mitigating the risks emanating from  shadow banking, its specifics, transparency and possible regulation in countries with different level of economic development.

In contemporary world, the volume of operations conducted by non-bank credit intermediaries and financial institutions is comparable with the volume of operations of the banking system. However, approaches to shadow banking and even the awareness of what institutes make up the shadow banking structures differ a lot in different countries. In particular, it is precisely non-bank credit intermediaries in developing countries that make up for the shortage of official banking services, thus making financial services accessible for the population. In developed countries, in their turn, where the shadow banking volume is considerably higher, alternative financial services provide for significant funding sources for financial markets and support market liquidity.

Shadow banking structures entail certain risks linked, first of all, with possible negative impact on financial stability and consumer rights. ‘The task facing the regulators at this stage is to work out such approaches that will ensure reduction of risks to financial stability, prevent suspicious operations from growing, and at the same time will not impede the development of this market’s segments, where such funding may be needed and will have a positive effect on economic development of every certain country’, Elvira Nabiullina, Bank of Russia Governor, noted opening the conference.

The conference participants focused primarily on the discussion of existing notions and definitions of the shadow banking system. According to the approach proposed by the Financial Stability Board (FSB), the activity of the shadow banking system is considered in the light of five economic functions: (1) collective investment management entailing the risk of investors’ mass withdrawal from funds; (2) lending using short-term funding; (3) intermediary services in the financial market using short-term funding or lending secured by customers’ assets (brokers-dealers); (4) assistance to lending (loan insurance, provision of guarantees, etc.); (5) securitisation of financial assets and funding operations with securities.

Based on the developed criteria, the FSB held shadow banking case studies in 26 developed countries and Robert Patalano, a FSB representative, told the conference about their outcome. He emphasised that the existing instruments are far from being perfect, there are gaps in the statistical data and discrepancies in definitions of structures and institutes being measured. Nevertheless, the FSB is gradually specifying the classification and makes the shadow banking assessment more accurate. According to the study outcome, in 2014 the shadow banking market volume stood at US$36 trillion, or about 60% of total GDP of 26 jurisdictions being surveyed. The overwhelming majority of the shadow banking system is concentrated in developed countries with more than half of its assets covering collective investment management, while the shares of other lines ranging from 7% to 13%. In 2014, growth in assets of the shadow banking structures turned out to be higher than 10%.

Robert Patalano explained to the conference participants in detail how the FSB obtained these figures and how the shadow banking risks were calculated based on these figures.

Currently, Russia is also developing similar instruments. The Central Bank of the Russian Federation believes that as of the end of 2014 the shadow banking system assets in Russia totalled a mere 10% of GDP (approximately 6.45% of the financial system assets). As far as the more precise figures are concerned, the mega-regulator intends to calculate them only after the instruments proposed by the FSB will be adapted to the existing environment in Russia.

Expounding on notions and definitions the Bank of Russia representatives noted that the term ‘shadow banking’ often has a negative connotation only due to its name and proposed to make a difference between non-regulated and non-transparent non-bank credit intermediaries and thoroughly regulated and supervised non-bank credit institutions. Starting 2013, when the mega-regulator was established in Russia, it has been supervising even those financial organisations and technologies that operated previously practically without control, i.e., e-money operators, brokers, microfinance organisations, credit cooperatives and pawnshops.

Speaking about digital financial services the Bank of Russia Governor emphasised that their development is of particular importance for Russia. ‘Spacious territory and hard-to-reach settlements are now isolating a part of population from modern financial services. That is why the digital development of these services is extremely important’, Elvira Nabiullina stressed.

According to the conference participants, financial inclusion is determined by the four factors: price accessibility, physical accessibility, mental accessibility (financial literacy of consumers) and assortment accessibility.

Following the statements by representatives of Germany and France, the forum participants noted that in developed countries the share of the shadow banking system in the total volume of assets is constantly on the rise, and it is important to promote new financial products and also take account of sweeping changes in economic environment. The conference singled out major trends in the shadow banking system development in Europe: to make financial resources accessible for institutional investors, to restore simple and transparent securitisation schemes, and to reduce national barriers for funding.

While discussing the respective experience of developing countries and emerging economies, in their turn, the conference participants spoke about the need to elaborate a balanced approach to regulate the shadow banking system, since the excess regulation in this sphere may undermine the idea of alternative forms of funding useful for the economy. Moreover, it is expedient to coordinate the development of the shadow banking legal base both on the national and supranational level in countries having more than one financial regulator. It is important not simply to copy international experience but also take into account the national peculiarities of the shadow banking system of a particular state.

The talk about innovations in non-bank financial structures was of particular interest, since the panelists discussed, inter alia, IT application both for payments and lending topical for a considerable part of population of developing countries. The discussion participants noted a great role played by balanced regulation not increasing the cost value of products being offered. Based on Russia’s experience in this sphere, it is assumed that our country may become the leader and coordinator of AFI regional activity to promote digital financial services.

The conference participants approved the outcome statement, which will serve as a basis for the concept of increasing transparency and reducing risks of the shadow banking system. A road map for policy decisions of AFI member states will be drafted in accordance with the concept.