LONDON May 2 Shining a light on the murky $70 trillion world of "shadow banking" is proving tricky for regulators handicapped by too little data and under pressure to boost economic growth, and this means risks may be escaping proper scrutiny.
Shadow banking, a term which annoys the sector because of its pejorative connotation, ranges from money market funds and repurchase agreements to special investment vehicles, hedge funds and securities lending.
They handle credit like banks but are not as heavily regulated and policymakers worry that as tougher rules hit lenders, risk taking will migrate to the complex web of shadow banking and stoke the next crisis.
The sector is growing, up by $5 trillion in 2012 with an increase in China causing regulators there to intervene.
Leaders of the G20 economies called for a crackdown on shadow banks in 2009 during the last financial crisis but five years on, regulators freely admit they are still not sure how the vast sector actually works.
"In general we don't fully understand how the financial system functions and I don't think you can unless you have the data you need," said David Wright, secretary general of the International Organisation of Securities Commissions, a global umbrella group of national market watchdogs.
"I think we have a long way to go to fully understand all the connectivities and subtleties of the financial system," Wright told the Reuters Regulation Summit.
In contrast to earlier political enthusiasm, cooler regulatory heads are increasingly loathe to rush in hard and fast rules.
"We need to become better in identifying risks in securities markets but that is less about more regulation, and more about supervision of the non-banking sector," Steven Maijoor, chairman of the EU's European Securities and Markets Authority, told the summit.
Regulators say analysis is still in its infancy without the basic data, and there is a need to stay neutral on whether shadow banking is good or bad or a mix of the two.
"Should everyone be regulated in the same way as banks? It's not clear to me that should be the case. We need to understand what it's about," a European financial supervisor said.
Maijoor said it will take years to plug the data gap.
Banking supervisors have gathered data on lenders for decades but still failed to spot the financial crisis coming.
Efforts by the EU and the United States market regulators to record just derivatives trades are patchy, with a single global snapshot of risk still far from possible.
Creating a cohesive set of global numbers for securities lending and borrowing, repos, money market funds and other parts of the shadow banking sector is an even more daunting task.
Meanwhile, Mark Carney, the Bank of England governor who heads the G20's Financial Stability Board, wants shadow banking rules largely completed by the next G20 summit in November.
WHAT'S IN A NAME
The FSB is due to publish the amount of collateral that will have to be held against repos and securities lending, one of the few hard global rules to emerge in shadow banking.
As regulators ponder what to do amid splits over potential rules, attitudes towards shadow banking are changing as politicians switch from wanting to regulate everything that moves to helping the economy at all costs.
Banks' focus on building capital buffers means that the funding gap for the economy is left to parts of the shadow banking sector, such as repos and securitisation, another factor injecting caution into rule-making.
"Do we understand if we put margin on an over-the-counter derivative what effect that will have on other parts of the market? I am not sure we do," Wright said.
Regulators increasingly refer to shadow banking as market based finance, raising two cheers in the sector, because the extent of supervision has increased, according to Maijoor.
Many of the institutions like hedge funds are now regulated but supervision of the complex web of shadow banking activities and its links to traditional banks is still relatively new and far from complete.
The United States and EU have failed so far to agree on rules for money market funds in their own territory let alone on a global basis, and there is a battle over whether shadow banking entities are systemically important and therefore should face extra capital requirements like the very big banks.
"There is a lot of unfinished business. Progress is being made but there is a lot to do," Wright said.
The G20 pushed through at breakneck speed a single set of tougher global capital rules known as Basel III, but given the lack of data about shadow banking, this one size fits all approach has quietly been ditched as practicalities and fears of crimping funding to the economy take the upper hand.
"We will need to react more on a bespoke basis than with some sort of big, draconian outcome and that's why understanding the whole issue is so important," the European supervisor said.
This rethink has gone further in the European Union where central bankers, including Carney, are even pushing for more lenient capital treatment for top quality securitisation in a bid to kick-start a market tarnished by the financial crisis.
Gabriel Bernardino, chairman of the European Insurance and Occupational Pensions Authority, told the Reuters Summit that capital charges on securitisation must be based on evidence. (Additional reporting by Lauren LaCapra in New York; editing by Giles Elgood)