Authorities ‘do not understand shadow banking’

Authorities are nowhere near to fully understanding “shadow banking” as the $75tn (€68tn) sector grows under the influence of new technology and regulation, a top markets supervisor said yesterday.

Shadow banking refers to the supply of credit outside traditional banks, such as from private equity investors, money market funds, insurers, repurchase agreements and securities lending.

The Group of 20 economies (G20) agreed during the 2007-09 financial crisis that the opaque sector should be better supervised, fearing that as traditional banks become more regulated, risky lending activities would migrate there. But progress has been slow.

“After 10 years of being a hot topic there isn’t a consensus yet,” said Ashley Alder, chief executive of Hong Kong’s Securities and Futures Commission.

“Is it banking or is it part of market-based finance? What are we going to do about it? We are nowhere near the finishing line.”

So far, regulators have limited themselves to tighter supervision of the sector and rules which make it more expensive for hedge funds and insurance companies to raise funds from loaning shares from the end of 2017. But shadow banking continues to grow, as credit from traditional banks has shrunk.

Reuters