Cathy Jamieson – 2014 Parliamentary Question to the HM Treasury

The below Parliamentary question was asked by Cathy Jamieson on 2014-06-17.

To ask Mr Chancellor of the Exchequer, what steps his Department is taking to ensure the stability of the shadow banking sector.

Andrea Leadsom

When appropriately conducted, shadow banking can benefit the economy by increasing the availability of credit to a range of individuals or firms, and provide a valuable alternative to bank funding. It provides credit and liquidity to the real economy and can improve efficiency and drive innovation in the financial system through firms developing expert knowledge in a particular area.

However, the Government is aware of the risks shadow banking activities pose to financial stability when things go wrong. The crisis showed that some shadow banking entities created pro-cyclical build-ups of leverage, did not fully transfer credit risk, were susceptible to rapid sell-offs, and were very complex. It also became clear that the shadow banking sector had very complex interconnections with the traditional banking system.

Recognising the need to improve the transparency and supervision of the shadow banking sector, the Government has taken steps to improve the way shadow banking entities are regulated.

Domestically, the Government has created new Financial Policy Committee (FPC) within the Bank of England to ensure emerging risks and vulnerabilities across the financial system as a whole are identified, monitored and effectively addressed. In September last year, the Committee agreed as one of its medium term priorities the identification and management of potential systemic risks from shadow banking.

At the international level, the Government is actively supporting the effective regulation of the sector in EU policymaking, and the UK is instrumental in shaping the global regulatory response at the Financial Stability Board.