THE WORLD’S finance watchdog yesterday outlined plans to clamp down on the poorly-regulated $60 trillion (£37.5 trillion) “shadow banking” system, to reduce the risks it poses to mainstream banks worldwide.
The Financial Stability Board, a global banking regulator, said it would add new regulation next year to make it harder and more expensive for banks to do business with the shadow banking sector, which includes money market funds, securitisation and securities lending.
While the FSB admitted that shadow banking entities provided extra funding and liquidity, it said the sector poses systemic risks to world financial structures.
“With regulation on banks tightened, it is important to address systemic risks...arising from the shadow banking sector and its interaction with the regular banking system,” said Lord Adair Turner, chairman of the FSB’s supervisory and regulatory cooperation committee.
He said the new rules expected next year would be “fundamental to the stability of the global financial system.” Lord Turner also chairs City regulator the Financial Services Authority and sits on the Bank of England’s new Financial Policy Committee.
The FSB unveiled draft recommendations for closer supervision and regulation of shadow banks, such as setting stricter limits on the size and nature of a bank’s exposure to shadow banking entities.
Any shadow banking entities a bank sponsors should be included on its balance sheet so that it would have to account for them in its mandatory regulatory capital buffer, and leverage and liquidity ratios, it added.
The FSB estimates that the sector represents between 25 and 30 per cent of the global financial system.
But money market funds have rejected their inclusion in the FSB’s definition of shadow banks, saying they have rigorous constraints.