© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
November 19, 2012 8:20 pm
Talk about party poopers. First regulators turned down the music, now they want to take away the punch bowl. The great post-crisis re-regulation initially focused on banks’ solvency. Those that could not raise equity had to deleverage fast to meet the new capital ratios. Now the Financial Stability Board plans to clamp down on shadow banking to reduce the risk that more lightly regulated and monitored non-bank activities destabilise financial systems. Shadow banking is the realm of lending that does not rely on deposit-taking banks using customer money to fund loans.
The FSB is right to be concerned. Shadow banking assets have kept growing since the last crisis to an estimated $67tn, or a quarter of total financial assets of the 20 countries and the eurozone covered in its survey. Put another way, that’s 111 per cent of their economic output. Banks have long shifted assets off their balance sheets to boost their leveraging power and profits. The FSB’s concerns are not limited to banks, but to fund managers, insurers and others. It wants to control the complex chains of deals that begin with stock lending or repo transactions but end up in other investments vulnerable to investor runs if the underlying asset values fall sharply. Fair enough. Insurer AIG had to be rescued after it invested part of the cash collateral proceeds from its $75bn of stock lending in long-term mortgage-backed securities on which the underlying loans turned sour.
Proposals to improve regulatory disclosure and monitoring are welcome. So too are restrictions on the amount of cash collateral from stock lending that can be reinvested. That should tame animal spirits. But just as higher capital ratios have had unintended pro-cyclical effects, poor execution of the FSB’s plans could stifle the more productive uses of shadow banking.
Email the Lex team in confidence at email@example.com
Please don't cut articles from FT.com and redistribute by email or post to the web.