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April 27, 2012 12:45 am
The global crackdown on “shadow banking” could include a requirement that any financial institution extending credit and relying on short-term funding must be regulated like a bank. The proposal is one of 10 steps that Paul Tucker, the Bank of England official helping shape the worldwide reform effort, will outline in a speech to a Brussels conference on Friday.
Mr Tucker is a leader of the Financial Stability Board’s global effort to tame the many financial institutions that act like banks, but operate around the edges of the regulated banking sector, and prevent a repeat of the 2008 financial crisis. The FSB, based in Switzerland, is due to make formal policy recommendations later this year about shadow banking to the leaders of the Group of 20 leading economies.
On Friday, Mr Tucker will make clear that regulators are not seeking to stop non-banks from extending credit. Rather, they want to make sure that shadow banks do not exacerbate economic cycles or engage in risky lending that imperils the broader economy.
“Non-bank intermediation of credit is not a bad thing in itself. Indeed, it can be a very good thing, helping to make financial services more efficient and effective,” he will say. “But ... true shadow banking can weaken the system. Regulatory arbitrage ... can distort and disguise.”
To prevent cheating, shadow banks should be prohibited from using client assets to finance their own business and their use of cash collateral should be more tightly regulated, Mr Tucker will say.
Banks in turn should be protected from failures in the shadow sector by tougher liquidity rules that would force banks to hold additional cash and easy-to- sell assets when they lend to other financial institutions. Regulators may also have to limit the extent to which banks can rely on “flighty” short-term funding, he will say.
The FSB work on shadow banking will be made public in a series of reports.
The first interim report, which came out on Thursday, identified seven stability concerns associated with the securities lending and repurchase or “repo” funding mechanisms. Mr Tucker suggests setting minimum margin requirements and “haircuts” for short-term secured lending could prevent banks from lending too cheaply in boom times.
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