The stability board streamlines its focus for regulating the shadow banking system.
The Financial Stability Board is zeroing in on key areas for review and regulation of the shadow banking system, including how banks interact with “shadow banking entities.” The main goal is to prevent lenders for taking excessive risk.
While ultimately protecting the global financial system by adding prudential oversight to complex and unregulated market, for corporate treasurers it could make the shadow system a bit more expensive to engage in (see related story here).
One of the great benefits of shadow banking is that it helps banks by enabling them to increase business volumes, become more liquid and offer the ability to reuse regulatory capital freed up for new operations. And amid the financial crisis, tapping the shadow market was thought to be a way to avoid the fallout from the wave of regulations and capital/liquidity requirements hitting banks.
Mario’s work.
The FSB will continue the work (and perhaps toughness) begun under Mario Draghi, the Italian Central Bank head and leader of the FSB who is on his way to take the helm of the European Central Bank. In its announcement, the FSB said it had narrowed its focus to five areas, which include the aforementioned bank interactions as well as money-market funds, other shadow banking entities, securitizations and securities lending and repos (“including possible measures on margins and haircuts”).
For banks, the FSB in particular will examine, “consolidation rules for prudential purposes; limits on the size and nature of a bank’s exposures to shadow banking entities; risk-based capital requirements for banks’ exposures to shadow banking entities; and treatment of implicit support.”
The FSB said it will set up “dedicated workstreams” to focus on each area. Depending on the area, these workstreams will be “undertaken by the relevant international standard setting bodies, while in others work will be carried forward under the guidance of the FSB Task Force.” The workstreams will then report their progress as well as their proposed policy recommendations to the FSB by July 2012 or the end of 2012 for securities lending/repos.
The FSB said it will also present more detail on the recommendations for oversight of shadow banking in a report for the G20 in October.