FSP issues shadow banking rules on securities, regulation

    Global plans to strengthen the regulatory oversight of shadow banking are nearing completion as the Financial Stability Board (FSB) released two new policy frameworks covering securities lending and supervision.

    The latest proposals are part of the international community’s efforts since the global financial crises to tackle the threat from shadow banking, the vast and largely unregulated world of hedge funds, money market funds and investment vehicles.

    The financial crises revealed that shadow banking - roughly half the size of the regulated banking sector - posed a severe threat to financial stability, not only because of its size and global reach but also because it is part of a complex chain of financial transactions with banks and insurance companies.

    “ Like banks, a leveraged and maturity-transforming shadow banking system can be vulnerable to “runs” and create contagion risk, thereby amplifying systemic risk,” said the FSB, the international body that monitors and coordinates global financial regulation on behalf of the Group of 20 (G20) leading economies.

    Over the last two years, the FSB has been developing a string of policies aimed at reducing the risk from shadow banking by creating a monitoring framework to track the sector and strengthen the oversight and regulation of the shadow banking system.

    "Most of these policy measures are now finalised and will be adopted by FSB members in an internationally-coordinated manner," said the FSB, adding that some of its latest proposals that cover minimum haircuts for securities financing transactions would be refined further to avoid any unintended consequences for the financial system.

     The challenge for the FSP, along with the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO), has been to devise rules that limit the risks yet retain the benefits and don’t stymie future financial innovation.

     "When implemented, this integrated set of policies should mitigate financial stability risks emanating from shadow banking. They should also limit the incentives of risky activities to move to the unregulated sector as tighter regulations on banks and other traditional market participants come into effect," the FSB said.

    While off-balance sheet financial entities and various forms of securitization have been around for centuries, the current form of shadow banking first took off in the last decades as banks exploited regulatory gaps and used regulatory arbitrage to minimize cost.  

     Click to read the FSB’s latest policy recommendations for shadow banking.

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Global supervisors aim to limit risks from shadow banking

    Shadow banking, the huge but unregulated frontier of the financial world, will soon be subject to bank-like supervision as global policymakers start to hammer out rules that reduce the chances of future crises yet still allow new creative financing models to emerge.
    The Financial Stability Board (FSB), which monitors and coordinates global financial regulation, has proposed an ambitious policy framework and recommendations that it believes are needed to “mitigate the potential systemic risks associated with shadow banking,” and expects to issue final proposals in September 2013 following industry comment.
    The term shadow banking describes the murky world of hedge funds, money market funds and investment vehicles that are often used by major banks to carry out sophisticated financial transactions.
    As these shadow legal entities do not take customer deposits, they don’t need banking licenses and are not subject to supervision.
    The 2008 global financial crises exposed the threat from shadow banking to financial stability, not just because of its vast size but because it was completely interwoven with the supervised banking system; a regulated banking system relied on unregulated entities with a razor-thin capital base.
    Global political leaders, meeting as the Group of 20, decided that the risks from shadow banking – about half the size of the normal banking system - posed too great a threat and asked the FSB to come up with policy recommendations.

Task force issues 7 disclosure principles for banks

    A task force comprised of bankers, investors, analysts, auditors and credit ratings’ officers has issued seven principles that should make it easier for shareholders to grasp the risks posed by banks and help restore their trust in the financial industry.

    The principles from the Enhanced Disclosure Task Force (EDTF), which was formed in May at the initiative of the Financial Stability Board (FSB), is different from recommendations by banking regulators because they arise from discussions between users and prepares of financial reports.

    “These principles provide a firm foundation for developing high-quality, transparent disclosures that clearly communicate banks’ business models and the key risks that arise from them,” said the report, co-chaired by Hugo Baenziger, supervisory board chairman of Eurex, Russell Picot, group general manager of HSBC, and Christian Stracke, managing director of Pimco.

    The principles are mainly aimed at improving risk disclosure by large international banks, but should also be applicable to all banks that access equity and debt markets.