Monday, September 5, 2011

FSB Identifies Five Areas for Detailed Study


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

The Financial Stability Board announced on September 1 the formation of dedicated work streams to help gauge the case for further regulatory action in five areas associated with shadow banking, notably including securities lending and repos.

  1. the regulation of banks’ interactions with shadow banking entities (indirect regulation), in particular, examining: consolidation rules for prudential purposes; limits on the size and nature of a bank’s exposures to shadow banking entities; risk-based capital requirements for banks’ exposures to shadow banking entities; and treatment of implicit support;
  2.  the regulatory reform of money market funds (MMFs);
  3.  the regulation of other shadow banking entities;
  4. the regulation of securitisation, in particular with regard to retention requirements and transparency; and
  5. the regulation of activities related to securities lending/repos, including possible measures on margins and haircuts.
These five work streams are an outgrowth of the FSB's ongoing study of the regulation of shadow banking.  As a result of a detailed monitoring exercise to review recent trends and developments in the global shadow banking system and a regulatory mapping exercise to take stock of existing national and international initiatives to address shadow banking, the FSB's task force determined that additional detailed study in each of these five specific areas of risk were warranted.  

Given the recent concerns expressed by the FSB, Bank of England, the Securities and Exchange Commission, and others, it is no surprise that securities lending and repo made the list of areas for focused study. 
 
 
In some cases the  workstreams will be undertaken by the relevant international standard setting bodies, while in others work will be carried forward under the guidance of the FSB Task Force. According to the Task Force, 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).
 
 

Adair Turner, chairman of the FSB Standing Committee on Supervisory and Regulatory Cooperation, said of these new workflows, “With regulation on banks tightened, it is important to address systemic risks – such as maturity transformation and leverage – arising from the shadow banking sector and its interaction with the regular banking system. The detailed recommendations that will be produced by the five workstreams during 2012 are thus fundamental to the stability of the global financial system.”

 
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