In particular, while the terms shadow banking or non-bank credit intermediation can be broadly described, this description is likely to be of limited value, and using it to develop practical policy is extremely challenging. Indeed, starting with the term and then attempting to come up with a definitive list of shadow banking activities or entities conducting these activities, or to come up with a single figure for the size of shadow banking is unworkable, unnecessary, and risks being a diversion from the real focus of policy, which should be the mitigation of systemic risk.
The policy should focus primarily on activities rather than the entities that conduct them,
The IIF is also keen to emphasize that shadow banking can serve a variety of useful functions, including:
Efficiency, innovation, and specialization. An extensive study by the New York Federal Reserve argued that there were also many examples of shadow banks that existed due to gains from specialization and comparative advantage over traditional banks...This can have additional benefits such as aiding financial inclusion.
Diversification and mitigation of risk. These activities can enable investors to diversify and mitigate their risks, as their deposits are not concentrated on a single bank balance sheet but are spread over a number of investments.
Greater flexibility and investment opportunities. These activities can give investors greater flexibility over the duration and risk profile of their investments and also broaden their investment opportunities, making available assets such as corporate treasury financing and mortgage loans, which might otherwise not be available.
Increased liquidity and funding. For borrowers and market participants, such activities can lead to a greater diversity and supply of funding and liquidity in the market. This option allows firms to reduce reliance on traditional sources of funding, sometimes at lower cost.
While some past reforms have been rushed and ill-considered, the IIF suggests that they could be more effective if they:
were based on a more thorough analysis of the risks; were consistent and connected with each other as part of a system-wide macroprudential appraisal of the risks; and were more internationally consistent and coordinated.
A one-size-fits-all approach simply cant work when dealing with a concept as inherently nebulous as shadow banking.