Achieving the G20 goal of resilient market-based finance

Dietrich Domanski

Financial Stability Review, 2018, issue 22, 155-177

Abstract: The 2007-09 financial crisis revealed fundamental weaknesses in the global financial system which authorities and market participants failed to identify and address until it was too late. One such weakness was the growth of complex financing structures and long intermediation chains outside the banking system, which had spread risk across the global financial system. When the crisis struck, the opaqueness of this shadow banking system, coupled with a growing realisation of the degree to which risks had been mispriced, led to a rapid deterioration in market confidence and a sharp tightening of financing conditions that affected businesses and households. In the decade since the crisis, authorities have sought to transform shadow banking activities into resilient market-based finance. Considerable progress has been made, with more effective oversight and regulatory frameworks now helping to better monitor and mitigate the risks associated with non-bank finance. However, the landscape of shadow banking activities continues to evolve. Consequently, identifying and assessing new and emerging risks remains essential in future. This article considers factors that contributed to the crisis, explores the significant reforms that have changed the financial system for the better, identifies emerging risks that authorities need to consider, and explores how macroprudential policies can address these risks.

Date: 2018
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