Regulation of shadow banking

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3 It also remains to be seen whether the new macroprudential supervisors such as the European Systemic Risk Board (ESRB) and FSOC – but also the FSB – will be able to identify such potential risks and make appropriate recommendations both to national supervisory authorities and policymakers. An additional challenge for these bodies will be how to cooperate internationally, since potential systemic risks and regulatory arbitrage due to differing national shadow banking regulation can only be identified and eliminated with the help of an efficient global macroprudential policy. 14 Regulation of shadow banking
4 bankenverband Workstream I: Banks’ interactions with shadow banking entities In Workstream I, the FSB seeks to address the systemic risks posed by the shadow banking sector through indirect regulation. Its aim is to reduce the systemic risks carried by shadow banking entities by regulating regular banks. To do so, the FSB looked at three areas: 1. Prudential consolidation of banks’ interactions with shadow banking entities. 2. Introduction of prudential limits for banks’ (large) exposures to shadow banking entities. 3. A possible increase in capital requirements for banks’ exposures to shadow banking entities (e.g. inclusion of investments in funds). through approach (LTA), a bank is required to riskweight the underlying exposures of the fund as if the exposures were held directly by the bank. Banks can use the mandate-based approach (MBA) if the conditions for applying the LTA are not met. Under the MBA, risk weighting is based on the information contained in a fund’s mandate or in the national regulations governing such investment funds. If neither of these two approaches can be applied, the fall-back approach (FBA) must be used. The FBA requires a bank to apply a 1,250% risk weight to its equity investment. These standards now have to be transposed into national law. The Basel Committee on Banking Supervision (BCBS) only presented regulatory proposals on areas 2 and 3 above in the course of 2013, in its consultative documents on the “Supervisory framework for measuring and controlling large exposures” and the “Capital requirements for banks’ equity investments in funds”. 11) Although final rules for both areas were supposed to be available by the end of 2013, only standards for the capital requirements for banks’ equity investments in funds were presented in mid-December. 12) The draft consultative document on prudential consolidation of shadow banking entities announced for the fourth quarter of 2013 has not yet been published either. The standards set for the capital requirements for banks’ equity investments in funds, which apply as of 2017, obligate banks to hold more capital to cover such investments in all types of funds. Banks have a choice of three approaches. Under the look- This does not, however, mean that we are just at the start of indirect regulation of shadow banking. Beyond the FSB approach to regulating shadow banking, the requirements for banks in regard to their transactions with shadow banking entities and the accounting rules for consolidation of these transactions were tightened beforehand both in the EU and the US. In July 2009, for example, the BCBS adopted tougher regulation (Basel 2.5) containing, in particular, higher securitisation and resecuritisation capital requirements for banks. Since then collateralized debt obligations (CDOs), based on asset-backed securities (ABSs), have been subject to a higher risk weight. Indirect regulation was also introduced through an amendment of the accounting rules on consolidation by both the International Accounting Standards Board (IASB) in Europe and the Financial Accounting 11) See FSB Monitoring Report of November 2013: www.financialstabilityboard.org/publications/r_131114.pdf 12) FSB and IOSCO only launched consultation on this aspect in January 2014 www.financialstabilityboard.org/publications/r_140108.pdf Regulation of shadow banking 15
Page 1: Regulation of shadow banking A guid
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Page 16 and 17: 4 Standards Board (FASB) in the US.
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Page 20 and 21: 5 EU In the EU, the UCITS Directive
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Page 30 and 31: 8 Workstream V: Securities lending
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Page 34 and 35: 9 Annex Table 1 The FSB approach No
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