Shadow bank­ing grows to $67 tril­lion in­dus­try, reg­u­la­tors say

The Pak Banker - - Front Page -


The shadow bank­ing in­dus­try has grown to about $67 tril­lion, $6 tril­lion big­ger than pre­vi­ously thought, lead­ing global reg­u­la­tors to seek more over­sight of fi­nan­cial transactions that fall out­side tra­di­tional over­sight.

The size of the shadow bank­ing sys­tem, which in­cludes the ac­tiv­i­ties of money mar­ket funds, mono­line in­sur­ers and off­bal­ance sheet in­vest­ment ve­hi­cles, “can cre­ate sys­temic risks” and “am­plify mar­ket re­ac­tions when mar­ket liq­uid­ity is scarce,” the Fi­nan­cial Sta­bil­ity Board said in a re­port, which uti­lized more data than last year’s probe into the sec­tor.

“Ap­pro­pri­ate mon­i­tor­ing and reg­u­la­tory frame­works for the shadow bank­ing sys­tem needs to be in place to mit­i­gate the buildup of risks,” the FSB said in the re­port pub­lished on its web­site. While watch­dogs have reined in ex­ces­sive risk-tak­ing by banks in the wake of the col­lapse of Lehman Broth­ers Hold­ings Inc. in 2008, they are con­cerned that lenders might use shadow bank­ing to evade the clam­p­down. Michel Barnier, the Euro­pean Union’s fi­nan­cial ser­vices chief, is plan­ning to tar­get money mar­ket funds in a first wave of rules for shadow banks next year.

The FSB, a global fi­nan­cial pol­icy group com­prised of reg­u­la­tors and cen­tral bankers, found that shadow bank­ing grew by $41 tril­lion be­tween 2002 and 2011. The share of ac­tiv­ity based in the U.S. has de­clined from 44 per­cent in 2005 to 35 per­cent in 2011, mov­ing to the U.K. and the rest of Europe.

Su­per­vi­sors con­sider shadow bank­ing ac­tiv­i­ties to be those that al­low banks to carry out busi­ness off bal­ance sheets, as well as those which al­low in­vestors to by­pass lenders and the func­tions they tra­di­tion­ally ful­fill on the mar­kets.

The FSB also tar­geted re­pur­chase agree­ments and se­cu­ri­ties lend­ing for tougher rules, rec­om­mend­ing that reg­u­la­tors im­ple­ment min­i­mum stan­dards for cal­cu­lat­ing losses on the dif­fer­ent types of col­lat­eral used in the transactions.

Re­pur­chase agree­ments are con­tracts where one in­vestor agrees to sell a se­cu­rity and then buy it back at a fu­ture date and a fixed price. Se­cu­ri­ties lend­ing agree­ments in­volve in­sti­tu­tional in­vestors such as pen­sion funds lend­ing fi­nan­cial in­stru­ments against cash col­lat­eral.

The group is also con­cerned that reg­u­la­tors are un­able to mon­i­tor the scale of the trades. Su­per­vi­sors should “col­lect more data on se­cu­ri­ties lend­ing and repo exposures amongst large in­ter­na­tional fi­nan­cial in­sti­tu­tions with high ur­gency,” the FSB said in the re­port.

Large firms should dis­close more in­for­ma­tion about the deals to in­vestors, the FSB said, and may be re­quired to pub­lish reg­u­lar state­ments de­tail­ing how much col­lat­eral they have and what it is used for. A bank­ruptcy ex­am­iner’s re­port found that Lehman used so­called Repo 105 transactions to move as much as $50 bil­lion tem­po­rar­ily off its bal­ance sheet to con­vince in­vestors it wasn’t car­ry­ing too much debt.

Fi­nal rules will be sub­mit­ted to lead­ers of the Group of 20 nations at a sum­mit in St. Peters­burg, Rus­sia, next year, the FSB said. Mark Car­ney, chair­man of the FSB, said ear­lier this month that reg­u­la­tors are hold­ing “in­tense dis­cus­sions” on shadow banks.

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