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15 January 2013

ABBL response to FSB Consultation on strengthening oversight and regulation of shadow banking

ABBL takes due note of the three consultation papers on shadow banking, but warns that the concept of "shadow" does not necessarily mean that the activities are not regulated or supervised, as many parts of these three dense areas are - or will soon be - regulated at EU level.

In addition, the Luxembourg Bankers' Association (ABBL) regards this exercise as the completion of the regulatory agenda started in 2009. Indeed, if there are now ideas to regulate, supervise and organise what is in the shadow, it may also mean that the origin of the shadow is already well regulated. This also means that the regulatory ideas envisaged should be understood as filling the gaps left by the current new regulatory environment and may be regarded as fine tuning of existing rules rather than an attempt to create an entire new set of additional regulations.

Although the association understands that discussions are beginning on the next steps and how to regulate “shadow activities”, it may be useful to stress that the regulatory agenda of the recent past has been extremely dense and goes in many directions but is for the time being still in the implementation stage.

The outcome in terms of cost or capital requirement as well as the impact on credit/lending activities are still unclear and have for sure not yet fully materialised. One may expect that rules such as Basel III, Dodd-Frank or their multi-instrument EU versions will have a significant impact on the capital structure of banks, their clients and the economy.

As a consequence, although things may always be improved, the first advice may be to leave some time for additional complementary measures being worked out so that a better understanding of their impact may be assessed based on real life experiences, notably in light of the high level of collateral that will be required.

In other words, deleveraging is a slow process to be accompanied by a careful approach. Unfortunately some measures envisaged seem to suggest that regulation is hitting the breaks with unknown, but certainly not profitable, consequences for economies.

Full response

© ABBL - Luxembourg Bankers’ Association

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