Shadow banking—fallout from the financial crisis?

Shadow banking—fallout from the financial crisis?

A widespread and highly profitable banking system is operating outside of the regulation of traditional banking. Tony Anderson, partner at Pinsent Masons, who consulted during the financial crisis, discusses the nature of shadow banking and whether regulation is not only desirable, but necessary.

Original news

The Financial Stability Board (FSB) is proposing to apply numerical haircut floors to non-bank-to-non-bank transactions in order to ensure shadow banking activities are fully covered, reduce the risk of regulatory arbitrage, and to maintain a level-playing field. The proposal has been set out for consultation in the Annex 4 of the Regulatory Framework for Haircuts on Non-centrally Cleared Securities Financing Transactions. Comments on the proposal should be submitted by 15 December 2014.

What exactly is meant by ‘shadow banking’? What type of activities does it cover?

Shadow banking encompasses a range of services undertaken by non-bank financial institutions and intermediaries similar to those which have been provided traditionally by commercial banks. Because they are performed by entities which are outside the regulatory framework governing banks and other deposit-taking institutions, they have caught the attention of regulators as being an area of potential risk. They include intermediaries as diverse as money market funds, hedge funds, private equity funds, securities broker dealers and credit insurance providers.

What are the key concerns of regulators around the issue of shadow banking, ie lending by non-bank institutions?

A key concern is that because they are not deposit-taking institutions, shadow banks are subject to far less regulation than traditional banks. They are able to enhance the returns they achieve by leveraging their balance sheets

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About the author:

Miranda is a solicitor specialising in leveraged and acquisition finance. She trained at Hogan Lovells International LLP and qualified into the international banking and finance team. During her time at Hogan Lovells she worked on a variety of domestic and cross-border transactions, acting for both borrowers and lenders. She also experienced secondments to Barclays Bank PLC and Kaupthing Bank hf.