January 26, 2011 / 2:02 AM / 9 years ago

DAVOS-Report sees risk from "shadow banks" as rules tighten

* Too much regulation could spur “shadow banking”

* Banks generating ‘super profits’ need to be monitored

DAVOS, Switzerland, Jan 26 (Reuters) - Regulators seeking to prevent the next financial crisis should be careful not to push banks too hard with rules that force financial activity into an unregulated “shadow banking” sector, a report said on Wednesday.

The report by management consultants Oliver Wyman, released to coincide with the World Economic Forum in Davos, Switzerland, said regulators should also keep an extra-close eye on banks that make a lot of money, as excessive banking sector returns are sometimes an indicator of trouble ahead.

“Businesses that are generating ‘super profits’ should receive additional attention from regulators,” said Barrie Wilkinson, a partner at Oliver Wyman.

Since the sub-prime lending crisis of 2007-08, regulators are tightening rules, adding requirements such as the Basel III banking capital regime aimed at preventing another crisis. But that will not eliminate risk of future crises, the report said.

“Current efforts underway to create a better system should not be taken as an assurance that the system is now safe from future crisis,” the report said.

Shadow banking, which shifts credit intermediation and other financial activities outside the regular banking system, could prove dangerous as banks hemmed in by new requirements shift risk to more loosely regulated areas of the financial system.

In order to detect future problems, regulators should avoid squeezing banks too hard but continue on the path of active stress testing, a method which can help banks understand how much capital they need to withstand shocks.

Writing by Lisa Jucca; Editing by Peter Graff

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