LONDONGlobal regulators published rules on Thursday to rein in risks in so-called shadow banking by increasing the amount of collateral required to back core transactions in a $137 trillion sector that continues to grow as mainstream banks shrink.
Shadow banking refers to credit creation through the likes of hedge funds, repurchase agreements, pension funds, insurers, and securities financing transactions.
Regulators have already imposed tougher capital requirements on mainstream banks after the 2007/09 financial crisis.
The Financial Stability Board (FSB), a regulatory task force for the Group of 20 economies (G20), published final rules on Thursday for regulating “shadow bank” transactions in case risky banking activities migrate to the hitherto less regulated sector.
They are the first set of global “haircuts” that must be applied to securities financing transactions between non-banks.
Haircuts refer to how collateral used for backing transactions must be discounted. In a securities financing transaction, a shadow bank borrows cash and has to post collateral in the form of securities such as shares.
Under the FSB rules a non-bank would have to post $106 in shares for every $100 borrowed.
The bulk of such transactions are conducted between banks or banks and non-banks, and the FSB has already published haircuts for these trades.
Thursday’s announcement signals a widening in the scope of shadow bank rules to cover the smaller but growing non-bank to non-bank transactions.
“Non-bank financing is a welcome additional source of credit to the real economy,” FSB Chairman Mark Carney said.
The FSB said it has also extended by a year to 2018 the deadline for applying the new haircuts.
Separately the FSB updated its figures on the size of the global shadow banking sector and introduced a new, narrower figure for the shadow banking activities it believes could pose risks.
The narrow figure excludes firms such as insurers and pension funds, but includes the likes of hedge funds and collective investment vehicles, such as money market funds, which can be susceptible to runs in a crisis.
The narrower figure shows that shadow banking grew to $36 trillion, or 12 percent of financial system assets, in 2014. That is up $1.1 trillion on the previous year, the FSB said.
A wider aggregate figure for all shadow banking activities, including pension funds and insurers who lend out their securities, grew by 9 percent to $137 trillion over the past year, representing 40 percent of total financial system assets.
“Perhaps more surprisingly, money market funds experienced 20 percent growth in 2014, largely driven by some euro area jurisdictions and China,” the FSB said.
The FSB announcements coincide with a summit of G20 leaders in Turkey next week which will take stock of their regulatory push since the financial crisis.
(Editing by David Goodman)