The shadow banking system - blamed for aggravating the financial
crisis - grew to a new high of $67 trillion globally last year, a top
regulatory group said, calling for tighter control of the sector.
The FSB, a task force from the world's top 20
economies, also called for greater control of shadow banking, a corner
of the financial universe made up of entities such as money market funds
that has so far escaped the web of rules that is tightening around
traditional banks.
"The FSB is of the view that the authorities' approach to shadow
banking has to be a targeted one," the group wrote in a report, noting
the current lax regulation of the sector.
"The objective is to
ensure that shadow banking is subject to appropriate oversight and
regulation to address bank-like risks to financial stability," it said.
Officials
at the European Commission in Brussels also see closer oversight of the
sector as important in preventing a repeat of the financial crisis that
has toppled banks over the past five years and rocked the euro zone.
The European Commission is expected to propose EU-wide rules for shadow banking next year.
The
United States is already rolling out a framework of new rules for the
$2.5 trillion money market industry, which pools money from investors to
put in low-risk financial assets that resemble deposits in a bank.
During
the crisis, heavy exposure to collapsed investment bank Lehman Brothers
caused the net asset value of one fund - the Reserve Primary Fund - to
drop below $1 per share, breaking an implicit promise of a guaranteed
minimum value.
Unlike banks, such funds are not backed up by the
Federal Deposit Insurance Corporation, and critics say a sudden
depositor flight from the sector could have equally devastating
consequences as a traditional run on a bank.
The Financial Stability Oversight Council (FSOC) - a new body of
regulators including the Securities and Exchange Commission (SEC) and
the Commodity Futures Trading Commission (CFTC) - said last week it
would not limit itself to money market funds.
It said that
"regulated and unregulated or less-regulated cash management products
may pose risks that are similar to those posed by money market funds"
and that it would address any risks arising in those areas.
AMERICA HAS LARGEST SYSTEM
The FSB has signaled a two-pronged approach to regulating
shadow banking, with tough rules such as possible capital charges and
limits on the size and nature of a mainstream bank's exposure to shadow
banks.
Other shadow banking activities which are seen as less systemically risky could face greater transparency requirements.
Critics
of this regulatory drive say that the definition the FSB uses to
describe shadow banks is intentionally vague, allowing them to probe and
potentially regulate corners of the financial universe that are seen as
harmless.
The FSB said shadow banking around the world more than
doubled to $62 trillion in the five years to 2007, and had grown to $67
trillion in 2011 - more than the total economic output of all the
countries in the study.
America had the largest shadow banking
system, said the FSB, with assets of $23 trillion in 2011, followed by
the euro area with $22 trillion and the United Kingdom at $9 trillion.
The
U.S. share of the global shadow banking system has declined in recent
years, the FSB said, while the shares of the United Kingdom and the euro
area have increased.
The FSB advocated better controls, but
cautioned at the same time that the sector can also be a source of
much-needed credit for business and consumers.
"Non-bank creditors
that smell, feel, and sound like banks but aren't in name are clearly
the problem; while non-bank creditors that do not, and are not linked to
the banking system, surely offer us a welcome reduced dependence on
banks," said Pete Han from the Cass Business School in London.
Forms
of shadow banking can include securitization, a method to transform
bank loans into a tradeable instrument that can then be used to
refinance credit, making it easier to lend.
In the run-up to the
crisis, however, banks such as Germany's IKB stored billions of euros of
such instruments in off-balance sheet vehicles, which later unraveled.
Another
example is a repurchasing agreement, or repo, where a player such as a
hedge fund or a blue chip company sells securities to a bank, agreeing
to repurchase them later.
The bank may then lend those bonds onto
another hedge fund, taking a position on the government debt. Such
agreements are used by banks to lend and borrow. A risk could arise if
one of the parties in the chain collapses.
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