Lenders want bespoke rules for shadow banks

Mon Jun 18, 2012 10:15am EDT

* Bankers call for tailored approach to shadow banking

* Regulators must avoid "Maginot line" between sectors

* Report coincides with G20 summit in Mexico

* Submission is for G20's Financial Stability Board

By Huw Jones

LONDON, June 18 (Reuters) - Blanket curbs on "shadow banking" could damage the financial system and set back economic recovery, a body representing the world's top bankers said on Monday, making a plea for more flexible reforms of the $60 trillion sector.

In a report published to coincide with the G20 summit in Mexico, the Institute of International Finance (IIF) cautioned against overkill in trying to draw a clear dividing line between shadow and mainstream banking.

The report is part of the bank sector's response to a call by G20 leaders in 2010 for its Financial Stability Board task force to draft rules by this December to shine a light on a sector that deals in vast amounts of credit but is less regulated than traditional banks.

Bankers worry that the tighter noose on mainstream lenders will push risky activities into the shadow banking sector, which includes money-market mutual funds, repurchase or repo markets, securitisation, securities lending, special investment vehicles and hedge funds.

The Washington-based IIF agreed on the need for the industry to help regulators in their work on shadow banks but called for a differentiated approach, saying securitisation, for example, would be essential for banks to wean themselves off taxpayer help.

"Industry and regulators should take a proportionate, activity-by-activity approach to non-bank activities that present specific risks to investors, financial stability or the wider economy, whilst seeking to preserve the benefits non-bank finance can provide," said Peter Sands, chief executive of Standard Chartered and chair of an IIF regulation committee.

Regulators should start by collecting top-quality data and then tailor their actions, the IIF said, though this suggestion is similar to a sequence the FSB has already pursued for over a year.

The FSB says the sector doubled to $60 trillion in the five years to 2007 when the financial crisis hit, but some sectors dispute their perceived risks as regulators also try to shift the debate from one of definition to a focus on risks.

ON THE BUSES

Fidelity Investments, the biggest U.S. money-market mutual fund manager has said it was the "antithesis" of shadow banking.

Money-market funds came under the spotlight in September 2008 when Reserve Primary Fund shares fell below $1, triggering a run by panicked investors.

The U.S. Securities and Exchange Commission is facing tough opposition from the $2.6 trillion industry to a new round of money-market fund reforms.

Other initial rulemaking has also had its difficulties.

IOSCO, the global securities watchdog, said this month it may have to intervene to iron out transatlantic differences in the way regulators have clamped down on securitisation which could make it harder for banks to raise funds.

Shadow banking is already adapting to a new regulatory world where mainstream lenders cut lending to conserve capital. British online payday loans provider Wonga.com for instance is advertising on the side of London buses its credit service for small firms to fill a gap left by banks.

"Financing for the economy is also increasingly coming from other areas such as big, cash-rich corporates helping to finance their supply chains and customers," said Mark Boleat, head of policy for the City of London Corporation, home to a large chunk of Britain's financial services industry.

FSB policy action will likely include more disclosures or curbs like capital buffers to cover bank exposures to shadow banking. The European Union will use these as a basis for its own proposals next year.

The IIF said extra capital requirements on banks has its limitations.

"Such a response would be tantamount to creating a 'Maginot line' between banks and the non-bank sector, giving the illusion of safety but not addressing the underlying risks in the broader financial system," the IIF said.