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Ireland and Luxembourg have intensified calls for tougher global rules on shadow banks in a bid to curb the risk of further financial turmoil erupting from a sector that spans everything from hedge funds to crypto firms.

Senior officials from the two EU member states, which together host shadow banks with around €10tn in assets, want regulators to develop tougher standards for a sector that remains subject to lighter regulation than traditional lenders despite holding around half of all financial system assets.

Vasileios Madouros, deputy governor of financial regulation at the Central Bank of Ireland, told the Financial Times that Dublin would call for the risks posed by an industry that has more than doubled in size since the 2008 global financial crisis to be contained by an “overarching, comprehensive” framework.

Marco Zwick, head of funds regulation at Luxembourg’s regulator, the Commission de Surveillance du Secteur Financier, said: “We have seen that an international crisis cannot be responded to by national initiatives alone; it needs a global response.”

Total shadow bank assets have risen to $240tn since 2008, according to research from global watchdog the Financial Stability Board. The push for tougher rules has gained prominence following a string of crises originating from the sector, which is less tightly regulated than the banking industry as firms do not hold retail deposits and were not deemed responsible for the global financial crisis.

Setting global standards is also complicated by the vast differences between institutions that fall under the shadow bank label.

Ireland and Luxembourg were at the centre of a recent crisis, when rapid selling by funds hosted by those countries forced the Bank of England to launch a £65bn bond-buying programme in September.

In response, Dublin wants a framework for all shadow banks that considers not just the risks that individual firms pose but the system-wide impact. “This is an area where we want to see meaningful progress,” Madouros said. The central bank would soon publish a paper outlining its proposals, he added.

Luxembourg, meanwhile, had been “actively working” on pushing tougher global rules, through its membership of groups such as the Financial Stability Board, which frames global policies for financial stability, and Iosco, which co-ordinates global securities regulation, Zwick said. More work was to come on “further enhancing and developing existing standards for liquidity risk management”.

Experts argue countries have an element of self interest in calling for more stringent global rules instead of imposing tougher ones themselves.

“It’s the old story that you don’t want to damp down the domestic sector which is producing a lot of tax revenues and which puts you in the front on an international stage,” said Richard Portes, co-chair of the European Systemic Risk Board’s joint expert group on shadow banking and a professor at the London Business School.

“There’s a reputational risk [to Ireland],” said one financial stability expert, adding that more turmoil emanating from the sector “could make investors and European authorities more cautious and give Ireland a hard time.”

However, one financial regulator said it was “really very difficult” for national authorities to “actually figure out” what the global risks from the funds headquartered there were.

Work already in progress globally includes improving liquidity in money market funds and open-ended funds.

Ireland, whose €4.6tn fund sector is around 13 times the size of the country’s economy as measured by gross national income, could not rely on an existing approach that centred on investor protection, said Madouros.

“While this dimension is critical, the impact of non-bank financial intermediation is broader than on their own investors,” Madouros said, adding that shocks could have “implications for the broader economy”.

The UK also is also seeking faster progress on regulating shadow banking. BoE governor Andrew Bailey has criticised Brussels for dragging its feet over money market fund reforms that have already been agreed globally, telling lawmakers in January that while the UK was taking action, “we need the EU to do it, and they have not done it yet”.

The European Central Bank, which is responsible for policing the eurozone’s largest banks, recently criticised the current regulatory regime for shadow banks as insufficient.

Madouros said Ireland itself faced “relatively limited” danger from its funds sector but that the central bank had a responsibility to ensure those funds did not jeopardise regional or global financial stability.

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