“Shadow banking” must be dragged into the harsh light of day and both it and global banks must be forced to serve the real economy, one of the world’s top regulators has warned.
These market-based sources of credit, which include corporate bond sales and direct lending by hedge funds, are now half the size of the traditional banking sector and growing still, even as many banks scale back their lending.
Mark Carney was appointed chair of the Financial Stability Board (FSB) in November and has been given a number of tasks by the leaders of the Group of 20 large economies. The aim is to prevent a repeat of the 2008 financial crisis. Top of his agenda is making large global banks safer and expanding the regulatory net to include “shadow” participants, such as investment funds and special vehicles, which compete with banks to extend credit.
The FSB head, who also serves as governor of the Bank of Canada, also told the Financial Times that bankers must stop trying to delay or water down the reforms so they can return to “business as usual”.
“The old normal was deformed,” he said. “For all the perceived difficulties the industry has ... [with] regulatory overload ... it pales in comparison to the difficulties, the lost output, the lost jobs ... quite frankly, the suffering that’s happening in a variety of economies.”
Once a rather low-profile discussion forum for finance ministers, bankers and regulators – the Financial Stability Forum – the FSB, as it became, was nominated in 2009 by the G20 to spearhead global reforms designed to prevent financial crises.
While it is a body that seeks consensus among its participants – national banks and regulatory authorities – its decisions are ratified by the G20 leaders and are beginning to have the same impact as those of the Basel Committee on Banking Supervision, which has many of the same members.
Mr Carney said regulators want to reshape the $60 trillion shadow banking sector so that it shifts from posing potential threats to serving as a valuable building block in a more stable financial system.
“What’s the opportunity in that half of the system? It’s to provide diversification for the financial system and, therefore, resilience,” Mr Carney said.
He also plans to make the 29 “global systemically important” banks write “living wills” by the end of this year. This aim is that governments will be able to break up and wind down very big banks rather than having to rescue them.
“There is an absolute objective...to end too-big-to-fail,” he said. “Market-based systems mean you live with the consequences of your action. You fail if you mess up.”
The FSB has drawn criticism from some bankers who say the wave of regulatory change is undermining the fragile economy and stunting lending.
Mr Carney promised global regulators would make changes if the industry could demonstrate that the new rules were having unforeseen consequences. But he warned that the FSB would not be deterred otherwise.
“We’re in the midst of a fundamental restructuring of that financial services industry,” he said. “We absolutely have to keep our mind or our eye on the end state that we’re trying to achieve.”