The Financial Stability Board is looking to tighten regulation of so-called shadow banking, but conventional investment banking could be hard hit.
After banking regulation comes ‘shadow’ banking regulation. Way back before the crisis it was actually the shadow banking sector that analysts feared might cause problems. The banks, it was argued, had distributed the highest risks off their balance sheets and into the shadows. While this was true up to a point, what became apparent with the onset of the crisis was that banking and shadow banking were entwined in a way that was much more destructive for banks than for other players.
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Fast forward to 2012 and are things any better? Measures under Basel III have raised capital requirements for re-securitisations and for liquidity facilities provided to securitisations. But for all the unwinding of off-balance-sheet vehicles that has taken place, the shadow banking sector is slightly larger than it was when the crisis first started – $67,000bn at end 2011 compared with $62,000bn in 2007.
One concern is that with banks now much more strictly regulated – so making some formerly mainstream activities unviable – further risks have piled up in the unregulated shadows. The Banker explored how asset managers such as Blackstone and M&G were getting into the credit business in a cover story in May 2012.
But in the latest policy recommendations from the Financial Stability Board (FSB), these are not the parts of the shadow banking sector of most concern. Instead the FSB worries about money market funds with their provision of short-term funds to the regulated banking sector and susceptibility to runs. The FSB is also concerned with repos and securities lending where re-hypothecation of assets (re-use of client assets) and collateral valuations are on the radar. The FSB is focused on activities that increase leverage and involve maturity transformation.
The FSB’s policy prescriptions include central clearing of repos, curbs on re-hypothecation, more stringent collateral valuations and better liquidity management of money market funds.
These policies, if adopted, are aimed at preventing blow-ups in the shadow banking sector – a worthy cause – but, in reality, their impact will be felt more critically in the regulated investment banking sector. The final outcome would be to reduce leverage further and increase liquidity requirements – in other words more of what Basel, etc... is doing already. At a time when the global economy is struggling under the existing deleveraging, the wisdom of doing this any time soon is questionable.
