* Tucker wants capital buffers on shadow banks
* FSB sees risks in securities lending, repo markets
* FSB to finalise policy recommendations by year end
* IOSCO mulls new rules for money market funds
By Huw Jones
LONDON, April 27 Supervisors should have powers
to demand more collateral in financial transactions in order to
cool down overheated markets, Bank of England Deputy Governor
Paul Tucker said on Friday.
He and other regulators from across the world are looking at
how to rein in the multi-trillion dollar "shadow-banking" sector
which handles credit and leverage outside traditional banking.
It includes money market funds, and securities lending and
repo markets which use collateral to underpin short-term
financing for banks and brokers.
Global regulators outlined on Friday their thinking on new
rules, such as tougher collateral requirements on securities
lending and capital buffers on money market funds.
"The authorities should be able to step in and set minimum
haircut or margin levels for the collateralised financing
markets, or segments of them," Tucker told a European Commission
conference on regulating shadow banks.
Higher margins would dampen volume and size of transactions
as more securities would be needed to manage the transaction.
"That would need to be pursued at international level,"
Tucker said, adding that shadow banks can play a useful role.
Industry officials say that such intervention in margins
would be a major change as there are no margins on many
Other steps could include greater transparency by using a
trade repository to record transactions, and clamping down on
how non-bank financial firms use cash collateral.
Tucker wants to force banks that sponsor or operate
off-balance sheet vehicles to consolidate them onto their
balance sheet so they would have to hold bigger capital
Banks should also hold more liquid assets against their
financing lines to financial companies, he suggested.
Supervisors could limit how much banks can fund themselves
short term from U.S. money market funds and other "fragile,
flighty sources", Tucker added.
Non-bank financial firms which raise short-term debt on
markets should also face "bank-type regulation and supervision
of the resilience of their balance sheets".
From next year the BoE's Financial Policy Committee will
have powers to directly order banks to increase their capital
levels in overheated markets.
Tucker is seen as a front runner to become the BoE's next
governor in 2013.
The European Commission will propose EU-wide shadow bank
regulation next year after a global regulatory body, the
Financial Stability Board (FSB), completes work on policy
recommendations for world leaders by November when G20 leaders
MONEY MARKET FUNDS
The FSB, of which Tucker is a member, said in an interim
report on securities lending and repos on Friday there was a
lack of transparency, potential risks from firesales of
collateral assets, and insufficient rigour in collateral
valuation and management practices.
"These finiancial stability issues will form the basis for
the next stage of the workstream's work, which is to develop
appropriate policy measures to address risks, where necessary,
by the end of 2012," the FSB said in a statement on Friday.
The board set up five workstreams last year to look at
different aspects of shadow-banking.
The fear among regulators is that as mainstream banking is
more tightly regulated, risky activities will migrate into
shadow banks which are far less regulated at the moment.
One workstream is looking at money market funds - pooled
investments that are important players in repo markets. Global
securities watchdog IOSCO began consulting on Friday to help the
FSB design rules for the $4.7 trillion sector.
It is looking at whether to encourage a shift to valuing
funds on a more transparent net asset value (NAV) basis whereby
shares reflect rises or falls in performance.
Most funds use constant net asset value (CNAV) whose shares
have an unchanging face value, with income is used to buy more
shares or paid out to investors.
IOSCO said it could also impose capital and liquidity
buffers to make the funds more resilient in rocky markets and
avoid taxpayers having to help out again.
Regulators were alarmed at big losses in money market funds,
especially when the Primary Fund "broke the buck" in 2008, a
rare occurrence which refers to when the fund's NAV drops below
$1 and fails to cover operating expenses or losses.