The first prominent and major gathering of global stakeholders on the topic of financial inclusion and shadow banking occurred 12-13 November in Moscow as the Central Bank of Russia (CBR) and AFI co-hosted the “Financial Inclusion and Shadow Banking: Innovation and Proportionate Regulation for Balanced Growth” conference.

The meeting featured more than 100 participants from 28 countries across the AFI Network, and attracted stakeholders from the private sector, developed country regulators, as well as international organizations such as the Financial Stability Board (FSB), World Bank and Consultative Group to Assist the Poor (CGAP).

Notably, the Moscow Resolution on Shadow Banking and Financial Inclusion was adopted, while participants also identified specific and practical actions to be taken forward by AFI and relevant network partners, including:

• An information gathering exercise with AFI members to improve the evidence base on shadow banking in developing countries;
• Documentation of case studies on successful approaches in implementing proportionate regulatory frameworks;
• A guide to the terminology around different manifestations of shadow banking;
• Guidance on proportionate regulation and supervision of non-bank financial institutions, and;
• The incorporation of the topic of regulatory and supervisory frameworks which support innovation while managing risks into the AFI Public-Private Dialogue (PPD) platform.

“Shadow banking has emerged as a pressing issue for many policymakers across the AFI network,” said Alfred Hannig, Executive Director at AFI. “The Moscow Resolution is an important step in helping to bring the non-banking sector out of the shadows and show its potential to advance financial inclusion.”

A critical objective of the conference was to enhance understanding of the different country-specific features of shadow banking, together with the oversight and regulatory frameworks being implemented by both developed countries and AFI member institutions from developing and emerging countries in regard to shadow banking activities and entities. Participants agreed it is necessary to manage the systemic risks emanating from certain unregulated shadow banking activities and entities while also developing and implementing appropriate regulatory and supervisory frameworks that facilitate the essential role of non-bank financial institutions in driving innovation and promoting financial inclusion.

Elvira Nabiullina, Governor at CBR, described her institution’s transformation into a mega-regulator responsible for supervising both bank and non-bank financial services had helped to mitigate and manage risks its shadow banking sector, and stated: “Regulators have to elaborate approaches that will manage the risks. We need a ‘toolkit’ that will correctly assess the shadow banking situation on a country basis…the Bank of Russia is committed to this work.”

Mr. Hannig mirrored this call as he presented the results of an AFI members survey on shadow banking, highlighting a “need to better understand the country conditions, what kind of shadow banking we are talking about, and whether it is regulatory arbitrage or sensible proportionality.”

The meeting featured sessions focused on defining the players, benefits and risks surrounding financial inclusion and shadow banking, developed and developing country perspectives, the role of innovation in promoting financial inclusion, and transforming shadow banking into resilient market-based financing through proportionate regulation and supervision.

Attendees commended the work of the FSB and other international organizations for their proactive lead in monitoring global trends and developing frameworks and toolkits to enable appropriate mapping of shadow banking activities and entities, as well as regulatory and supervisory responses, and the role of such frameworks in contributing to greater financial stability.

Participants expressed a desire for more information from developing countries on the nature of shadow banking in their jurisdictions. This included innovations taking place in each country along with the regulatory and supervisory responses to them, testing the applicability of the existing tools and frameworks in these contexts, and a call to consider modifications for local circumstances where appropriate.

There was widespread recognition of the important role of innovation, both from banks and non-banks, in driving financial inclusion—particularly in developing countries—and the importance of ensuring responses to regulatory arbitrage and systemic financial stability risks presented by certain shadow banking activities and entities do not inadvertently restrict or overburden those parts of the non-bank sector which play a key role in financial inclusion but do not themselves present systemic risks.

Finally, financial education of consumers was identified by many participants as a vital complement to efforts to implement appropriate regulatory and supervisory frameworks, in order to minimize the risk of consumers turning to unregulated or inappropriate financial products or services in the shadow banking sector.