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

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 Perspectives 3 Financial Sector Development Department, SAMA, March 5, 2015

Global Perspectives 4 Financial Sector Development Department, SAMA, March 5, 2015

Global Perspectives 5 Financial Sector Development Department, SAMA, March 5, 2015

Global Perspectives 6 Financial Sector Development Department, SAMA, March 5, 2015

Global Perspectives 7 Financial Sector Development Department, SAMA, March 5, 2015

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 8 Financial Sector Development Department, SAMA, March 5, 2015

Definitions Unregulated or Bank-like entities lightly regulated without government bank-like backup or access to intermediation central bank liquidity Activities Entities Credit intermediation involving entities and activities outside the regular banking system …or both 9 Financial Sector Development Department, SAMA, March 5, 2015

…& Measures FSB 3 ways to measure SB IMF Flow of (Non-core Funds liabilities) 10 Financial Sector Development Department, SAMA, March 5, 2015

…& Measures Source: GFSR, Oct 2014, IMF 11 Financial Sector Development Department, SAMA, March 5, 2015

…& Measures ( Flow of Funds) Source: GFSR, Oct 2014, IMF 12 Financial Sector Development Department, SAMA, March 5, 2015

…& Measures (FSB) Source: GFSR, Oct 2014, IMF 13 Financial Sector Development Department, SAMA, March 5, 2015

…& Measures (IMF) Source: GFSR, Oct 2014, IMF 14 Financial Sector Development Department, SAMA, March 5, 2015

…& Measures Investors/ Banks Loans Deposits Borrowers Lenders Source: GFSR, Oct 2014, IMF 15 Financial Sector Development Department, SAMA, March 5, 2015

Some Specific Risks of Shadow Banking Run Opacity & Spillovers (de-)Leverage Risk Such risk is During stress In good times, usually greater in periods, shadow banks SB, due to Investors tend may contribute absence of to retrench and substantially to formal backstops flee to quality asset price or prudential and seek more bubbles, as less- standards transparency regulated entities 16 Financial Sector Development Department, SAMA, March 5, 2015

Some Specific Risks of Shadow Banking 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 17 Financial Sector Development Department, SAMA, March 5, 2015

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 18 Financial Sector Development Department, SAMA, March 5, 2015

Size and Growth of Shadow Bank(ing) Shadow Banking Growth (Percent of GDP) Source: GFSR, Oct 2014, IMF 19 Financial Sector Development Department, SAMA, March 5, 2015

Size and Growth of Shadow Bank(ing) Shadow Banking Growth (Percent of Banking Assets) Source: GFSR, Oct 2014, IMF 20 Financial Sector Development Department, SAMA, March 5, 2015

Size and Growth of Shadow Bank(ing) Breakdown by Subsector (Percent of entities’ financial assets) Source: GFSR, Oct 2014, IMF 21 Financial Sector Development Department, SAMA, March 5, 2015

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 22 Financial Sector Development Department, SAMA, March 5, 2015

Key Drivers of SB Growth 23 Financial Sector Development Department, SAMA, March 5, 2015

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 24 Financial Sector Development Department, SAMA, March 5, 2015

Shadow Banking and Financial Stability • How big these entities are Size • Based on assets are of long or short Maturity Risk duration • Based on assets are liquid and easy to Liquidity Risk trade • Based on share of loans assets that Credit Risk carry substantial credit risk • Total assets to equity Leverage • How these entities are exposed to banks Interconnectedness through assets holdings or liabilities 25 Financial Sector Development Department, SAMA, March 5, 2015

Shadow Banking and Financial Stability Shadow Banking Risks in the EU Source: GFSR, Oct 2014, IMF 26 Financial Sector Development Department, SAMA, March 5, 2015

Shadow Banking and Financial Stability Shadow Banking Risks in the United States Source: GFSR, Oct 2014, IMF 27 Financial Sector Development Department, SAMA, March 5, 2015

Shadow Banking and Financial Stability Shadow Banking Risks in Japan Source: GFSR, Oct 2014, IMF 28 Financial Sector Development Department, SAMA, March 5, 2015

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 29 Financial Sector Development Department, SAMA, March 5, 2015

Regulations & SB’s Risks . 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 of 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. 30 Financial Sector Development Department, SAMA, March 5, 2015

Regulations & SB’s Risks . To handle the potential risks of shadow banking, the IMF suggests adopting the following framework: Source: GFSR, Oct 2014, IMF 31 Financial Sector Development Department, SAMA, March 5, 2015

Some Countries’ Experiences/ Efforts to handle SB’s Risks 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. 32 Financial Sector Development Department, SAMA, March 5, 2015

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 33 Financial Sector Development Department, SAMA, March 5, 2015

Saudi Arabia’s Case: Highlights SAUDI ARABIA: SHARE OF CREDIT PROVIDERS (AS OF JUNE 2014) Investment Funds Individuals* 7% 0% SCIs 17% Finance & Leasing Companies Banks 7% 69% Source: SAMA, CMA 34 Financial Sector Development Department, SAMA, March 5, 2015

Saudi Arabia’s Case: Highlights Growth of Credit By Providers 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 2010 2011 2012 2013 2014 Banks Finance & Leasing Companies SCIs Investment Funds Source: SAMA, CMA 35 Financial Sector Development Department, SAMA, March 5, 2015

Saudi Arabia’s Case: Highlights Finance Investment Companies Funds Shares & Consumer Bonds Money Commercial Market Real Estate Real Estate 36 Financial Sector Development Department, SAMA, March 5, 2015

Saudi Arabia’s Case: Highlights Credit by Finance Companies (June 2014) Real Estate 14% Commercial 18% Consumer 68% Source: SAMA, CMA 37 Financial Sector Development Department, SAMA, March 5, 2015