Thursday, March 15, 2012

UK's FSA chief Turner wants radical rules to rein in shadow banking

In a Telegraph article, the head of the UK's Financial Services Authority called for radical change in the rules governing shadow banks.

Policymakers say the opaqueness of the $60 trillion shadow banking system - a web that includes money market funds, securities lending and repos - which operates alongside mainstream lenders contributed to the financial crisis.... 
The dangers of shadow banking were spotted over a decade ago but little was done. 
"This time we need to ensure that we are sufficiently radical," FSA Chairman Lord Turner said in a lecture at the Cass Business School. 
"Any system this complex will defy complete understanding, and any belief that we can precisely calibrate our response to it will therefore be a delusion," said Turner, who also sits on the FSB. 
Instead, regulators should play safe with a "bias to prudence" against such complex interconnectivity in the financial system.... 
The task of regulating shadow banks is challenging, not least in defining what is shadow banking and exactly how it has contributed to financial instability in the past, he said. 
Shadow banking is not "something parallel to and separate from the core banking system, but deeply intertwined with it". 
The FSB has defined shadow banking as involving credit intermediation outside the banking system and includes money market funds, conduits, securitisation lending and repos....
Since the task of regulating shadow banks is challenging, a prudent first step might be to bring ultra transparency to the shadow banks.  That way all market participants could see and independently assess what is going on.
Turner said shadow banking, on some measures, is a shadow of its former self following the collapse of securitised credit, shrinking money market funds, and smaller investment bank balance sheets.
Based on your humble blogger's best estimates, securitized credit has fall almost $3.5 trillion since the beginning of the financial crisis.
"And certainly the decline along these several dimensions suggest that the immediate risks are smaller, allowing us time to think through the appropriate policies," Turner said.
And time to implement ultra transparency to see what policies are actually necessary. 

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