In an
April interview with BaFin Quarterly, Dr. Elke König, the head of Germany's Federal Financial Supervisory Authority (BaFin), called for the swift regulation of shadow banking and derivatives. Critical of the FSB's data gathering approach to shadow banking, König said that regulators must push ahead with regulating shadow banking straight away, or they will be regulating banks while more dangerous shadow banking risks grow.
It is very important that we don't get bogged down on this. So far the various FSB working groups have merely been gathering the facts. In doing so, we are defining quite wonderfully everything there is, in order then to continually identify and add new points. But we urgently need to move from description to action on this subject. Otherwise we'll be regulation the banking market while the risks are being created next door.
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Attention was focused on developing new capital and liquidity rules. Although at that time there were fears that funds might shift into the shadow banking market, the problem itself was not tackled at first. Now that it is possible to tell in which direction the markets are changing, we must on no account take even more time on regulating shadow banks. If we don't make significant progress soon, it is only a question of time before we are hit by unpleasant surprises from this area.
König worries that the momentum for regulating shadow banking may be waning as countries' focus on their own short-term interests. She even sees some evidence of stonewalling on the part of certain countries; however, even these recalcitrant participants appear to be moving.
The problem is that by now national interests are diverging relatively widely again. Unfortunately, a good many countries appear to be focusing more on short-term market advantage than long-term stability. I also have the impression overall that the enthusiasm for this topic is waning. During the financial crisis the pressure to do something was very high.
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Of late, I have gained the impression that some countries who have up to now been stonewalling are shifting ground a little.
The way forward is clear, König, believes.
The next step must therefor be to make the connections between regulated banks and shadow banks transparent. We must then regulate these connections if need be. But the regulation of shadow banks themselves is also something we should push ahead with straight away. That's the only way dangerous arbitrage can be stopped.
Dr. König is also disappointed with the pace of regulation of derivatives, which she sees as another great area of risk and dangerous complexity.
Above all, there would be the international regulation of derivatives trading. This subject is making slower progress than hoped. I think this is due, firstly, to the fact that things are enormously complex. More an more very different players are involved in such transactions. Secondly, the industry must of course be given the chance to implement everything that is agreed, and there the devil is in the detail.
As with the regulation of shadow banking, the perfect should never be the enemy of the good, and striving for perfect regulation of derivatives and shadow banking is impractical and unwise.
But we need regulation urgently; I see no alternative -- even though there will of course never be a watertight solution. The subject will raise entirely new questions: What happens if a Central Counterparty fails? Or how can we make it possible for supervisors to have access to data available on global transactions registers? But transparency in this market, which is after all closely linked with the shadow banking sector is imperative.
Dr. König remains optimistic that by raising these issues in international bodies, trying to win support, finding allies, and forming majorities, she may build some renewed momentum and bring the world's interest back to dealing with derivatives and shadow banking.