September 2, 2011 / 9:06 AM / 8 years ago

G20 task force steps up work on shadow bank rules

LONDON (Reuters) - The Financial Stability Board, a task force set up by world leaders to strengthen regulation, will step up work on new rules to supervise the multi-trillion dollar “shadow banking” sector.

The FSB said it has set up workstreams to focus on five areas for possible closer supervision, including how banks are linked to shadow banking entities, reform of money market funds and securitisation.

“The workstreams will develop preliminary work plans shortly and report their progress as well as the proposed policy recommendations to the FSB by July 2012, or end 2012 for securities lending/repos,” the FSB said in a statement.

A New York Federal Reserve report last year estimated the shadow banking sector at around $15 trillion (9.26 trillion pounds).

The FSB will give finance ministers from the Group of 20 economies (G20) an update on its work in October ahead of a G20 leaders summit in November.

Regulators worry that as regulation tightens for banks, risky activities will migrate to less regulated entities.

There is no globally agreed definition of what constitutes shadow banking but regulators often include entities such as hedge funds, private equity, conduits, money market funds, special investment vehicles and asset backed commercial paper.

They typically perform some of the functions of a bank, particularly financing long-term loans with short-term borrowing, but remain outside mainstream banking.

Some conduits and money market funds blew up during the financial crisis and supervisors see regulating them as part of wider efforts to ensure financial stability by nipping emerging asset bubbles in the bud.

The FSB said a data gathering exercise this summer could be the basis for a more formal information gathering process of shadow banking risks from 2012 onwards.

“The quality of these assessments should improve over time as more data become available through initiatives by FSB member authorities,” the task force of central bankers, treasury officials and supervisors from the G20 countries said.


There is some disagreement among regulators of how best to regulate shadow banks — directly or indirectly via the banks that supply credit.

The FSB had already indicated it was studying the shadow banking sector and posted industry reaction on its website.

The Alternative Investment Management Association (AIMA), a hedge fund lobby, cautioned against a wide catch-all definition that will draw in most asset managers, even though providing products to retail customers.

JPMorgan Chase’s Chief Risk Officer, Barry Zubrow, called for a framework that is flexible enough to focus on the wide range of activities in the sector and address regulatory arbitrage concerns.

The Institutional Money Market Funds Association rejected the FSB’s description of money market funds as shadow banks. “The only thing they share in common with a bank is that they transform liquidity, but they do so on a tiny scale and subject to rigorous constraints,” IMMFA Chairman Travis Barker said.

BlackRock, the world’s biggest asset manager, looking after funds totalling $3.56 trillion at the end of 2010, acknowledged that government intervention was needed to support money market funds after the collapse of Lehman Brothers bank in 2008.

“However, we believe that these should take into account the changes already made to the regulatory regime for MMFs in the U.S. and Europe which have strengthened the product model and reinforced their relevance to investors,” BlackRock said.

Reporting by Huw Jones; Editing by Jon Loades-Carter

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