29 August 2013

Reuters: 'Shadow' banks face 2015 deadline to comply with first global rules

The $60 trillion "shadow banking" sector has been given until 2015 to comply fully with its first set of global rules, after an international regulatory task force unveiled plans to curb risk without strangling economic recovery.

Leaders of the group of 20 economies (G20) meet in Russia next week to endorse the rules written by their Financial Stability Board (FSB), setting out requirements for the sector and how it must be supervised. The FSB will report on progress to the G20 next year with formal checks on compliance starting that year.

Shadow banking takes in a variety of financial intermediaries and remains a source of systemic risk for taxpayers after the 2007-09 financial crisis revealed "fault lines" that resulted in mainstream lenders needing public bailouts.

National regulators must also be equipped with a set of tools to allow measures such as the imposition of capital and liquidity requirements or temporary limits on how much cash clients can pull out to avoid the destabilising "runs" on money market funds seen during the crisis in the United States.

The rules are designed to curb excessive risk-taking by a sector that does not have access to central bank support or safeguards such as deposit insurance and debt guarantees. However, the FSB has sought to balance its proposals with the need to avoid harming an industry that is vital to financing the economy.

The European Union, meanwhile, publishes its own roadmap next week and has signalled that it may go further than the G20 rules and impose mandatory capital requirements on the sector.

Shadow banking activities that have been targeted include credit investment funds, exchange-traded funds, credit hedge funds, private equity funds, securities broker dealers, credit insurance providers, securitisation and finance companies.

The FSB has decided to press ahead with plans to set the world's first minimum discounts, known as "haircuts", on the value of collateral to back repurchase, or repo, transactions and securities lending to ensure a big enough cushion if market valuations plunge.

Regulators are also finalising new curbs on links between mainstream banks and shadow banking participants, though the FSB has not set a date for their introduction.

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