Change Overview and Rationale
Deloitte LLP has come up with clever new way to describe and track the size and changes in the shadow banking industry. Recognizing that market participants and regulators lacked clarity and consistency when it came to defining, measuring, and framing the debate about this complex and dynamic subject, Deloitte has devised a “Shadow Banking Index.”
Verena Ross, Executive Director of the European Securities and Markets Authority, says that the EU will lead by example in the harmonization and convergence of regulation of OTC derivatives. With the plan for the EU regulation of OTC derivatives, central counterparties, and trade repositories (EMIR) now having been agreed upon by the European Parliament and the Council, ESMA is due to deliver draft regulatory and implementing technical standards under EMIR in June. Ross believes that if the EU is able to harmonize regulation and integrate supervision in Europe, the same convergence is possible, and necessary, globally.
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.
In an April 13 address, Ben Bernanke, Chairman of the Board of Governors of the Federal Reserve System, made clear that he sees the system of shadow banking as a key vulnerability that makes another catastrophic economic crisis nearly inevitable. In Bernanke’s view, the increased importance of the so-called shadow banking system is the primary reason for the severity and pervasiveness of the financial crisis, and the regulatory gaps in which shadow banking activities operate must be addressed by policy makers.
In his October 10, 2012 remarks at the University of Pennsylvania Law School, Federal Reserve Board Governor, Daniel K Tarullo, criticized Dodd-Frank sharply for missing the mark in a number of vital ways in its framework for ensuring financial stability. Tarullo called Dodd-Frank a sweeping piece of legislation pieced together in a crisis, based on some theories of financial stability that are in many respects undeveloped or uncontested, and incomplete in a number of systematically important risk areas. According to Tarullo, this lack of an overarching unifying concept of financial stability or an officially embraced consensus theory of how financial stability is undermined presents a major weakness in the reform effort and is a significant hurdle for regulators in implementing and enforcing the legislation. This poor theoretical foundation for financial stability leaves major gaps in the handling of the moral hazard associated with too-big-to-fail institutions, as well as other areas like shadow banking. Consequently, Tarullo believes that these gaps in Dodd-Frank leave room for further Congressional action, including imposing caps on the size of banks.
The FSB Workstream on Securities Lending and Repos (“Workstream”) under the FSB Shadow Banking Task Force has published an interim report on its findings and progress. The mission of the Workstream is to present, by the end of 2012, policy recommendations to strengthen regulation of securities lending and repos within the context of the shadow banking system. In order to inform its decision on proposed policy recommendations, the Workstream has reviewed current market practices through discussions with market participants, and existing regulatory frameworks through a survey of regulatory authorities. This interim report identifies a number of securities lending and repo issues that might pose risks to financial stability, and positions repo and securities lending in within the shadow banking framework, laying out the Workstream’s focus as it develops its recommendations.
Just in time for the CFTC and SEC’s final swaps provisions, State Street and TABB Group have published a paper, Charting New Territory: Buy-Side Readiness for Swaps Reforms, based on a survey of buy-side firms examining where the investment community stands on a range of issues arising from global swaps reforms. The paper also looks at the challenges the industry faces as it transforms from an opaque, over-the-counter, bilaterally traded environment to electronic execution and central clearing.
The Bank for International Settlements has issued preliminary locational and consolidated banking statistics for the quarter ended September 30, 2011.
Responding to strident criticism of proposed regulations implementing the Volker Rule, former Fed Chair Paul Volker and the Senate authors of the Dodd-Frank Volker Rule provisions defended the rule as absolutely vital and urged the SEC and banking agencies to eliminate unjustified exclusions and exemptions, such as proposed hedging exemptions related to bank investments in private funds.
Even as countries strive to meet the quickly approaching Basel III deadlines, some fairly influential voices in regulatory policy are wondering aloud if the latest Basel guidelines are up to the task. Thomas M. Hoenig, director of the Federal Deposit Insurance Corporation, in a September 14, 2012 address before the American Banker Regulatory Symposium, raised his concerns that Basel III is based on faulty assumptions and processes, and introduces unworkable complications into an already complex system. Hoenig proposes an alternative, a “back to basics” approach he feels would be more easily monitored and enforced, and represent a better measure of a firm’s ability to withstand financial adversity.