Regulators warn on shadow banking risks
GlobalMarkets, is part of the Delinian Group, DELINIAN (GLOBALCAPITAL) LIMITED, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 15236213
Copyright © DELINIAN (GLOBALCAPITAL) LIMITED and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Emerging Markets

Regulators warn on shadow banking risks

tucker250.jpg

Mounting liquidity concerns in developed world banking sectors could drive further growth of the shadow banking sector, regulators have warned

The regulatory spotlight is turning to the “shadow banking” system, a seminar in Washington heard yesterday, as fears grow that lending will shift from hobbled US and European banks into largely unregulated non-bank institutions.

Richard Berner, counsellor to the US Treasury Secretary, said that the huge but opaque shadow banking system in the US controls $16 trillion and is larger than the traditional banking sector.

The shadow banking system also plays a major role in the financial systems of China, Japan and Europe, Berner pointed out. It is made up of multiple types and sizes of institution – including finance companies and money market funds – and as yet there are no common definitions of what constitutes shadow banks.

The shadow banking system handles huge volumes of funds that flow freely across national borders and are subject to “regulatory arbitrage”, as lenders and investors seek the least regulated environment.

As established banks come under pressure to deleverage and cut assets – in an effort to repair damaged balance sheets and meet stricter capital requirements under the Basel III rules – there are fears that money will shift increasingly into shadow banks, provoking further crises in the future.

Paul Tucker, deputy governor for financial stability at the Bank of England, said that the focus of regulatory attention has been “too much on banks” and not enough on non-banking institutions. The latter have equal or even greater importance in some cases.

The focus is shifting now, as organizations ranging from the G20 to the IMF and the Financial Stability Board turn the regulatory spotlight on shadow banks, noted Hioroshi Ugai, deputy director general in the international department of the Bank of Japan.

There are strong linkages between major banks and non-banking institutions because of the flow of funds from the former to the latter, Tucker pointed out. Loans such as these are treated as being “zero-risk assets”, whereas the risk could be significant in certain cases, he said.

In a sense, the shadow banking system represents the “plumbing of the financial system” and yet policymakers have tended to take little interest in it “until things go wrong,” he said. Players in the shadow market will continue trying to circumvent rules until authorities show willingness to get tough, he added.

In Japan, the major banks had little direct exposure to toxic assets that brought about the 2008 global financial crisis – but Bank of Japan research has since shown that their involvement via non-bank financial institutions was bigger than originally believed, Ugai said. “Shadow banks purchased securitized products,” whereas banks in Japan generally avoided them.

The data available on shadow banking “is not sufficient”, either in Japan or in other countries where secondary banking institutions play a major role in overall financing, Ugai added. “We need to develop a good database and be able to detect risk.”

Because of the role played by various types of money market funds and other similar players, “it is essential to bring securities regulators as well as banking regulators into the overall regulatory debate on the shadow banking sector,” said Tucker.

Gift this article