Hedge funds officially welcomed in from the shadows

LONDON — Hedge funds and other alternative investments will no longer be dubbed “shadow banks” by global regulators, lifting a pejorative label which has stuck to the $45-trillion sector since the financial crisis.

Treated with suspicion by regulators and policy makers, “shadow banks” have in recent years been welcomed as providing market-based capital to plug gaps left by retreating banks.

The Financial Stability Board (FSB), which coordinates financial rules for the Group of 20 Economies (G20) is replacing the term with “non-bank financial intermediation” in all its work.

“The new terminology emphasizes the forward-looking aspects of the FSB’s work to enhance the resilience of non-bank financial intermediation,” the FSB, which is chaired by Bank of England Governor Mark Carney, said in a statement on Monday.

As regulators tightened the noose on banks, forcing them to hold far more capital than they did before markets went into global meltdown in 2007-09, non-banking financial alternatives like investment managers and hedge funds, repurchase agreements and securitization sectors grew.

Although the FSB has introduced tougher rules since the crisis, the term shadow banking is likely to survive with the latest FSB figures showing it grew 7.6 percent to $45.2 trillion in 2016, representing 13 percent of total financial system assets in 29 jurisdictions surveyed.

The FSB also said in a statement it will develop global practices for banks to respond and recover from cyber attacks, and a report will be published by mid2019.

But the board said much of its work programme will focus on implementing and tweaking rules already agreed, rather than embarking on a wave of new regulation.

The appetite for new rules has waned, with the United States trimming its rulebook to encourage lending by banks. •