Global financial regulators are preparing a clampdown on so-called shadow banking as they confront the unintended consequences of previous waves reform that pushed risks into hidden corners of the financial system.
“We never really thought that we were solving one problem and what would the knock-on be?” said one financial stability policymaker from that crisis era, arguing that regulators are now entering a “new phase”, where they have to ask “where did the risk pop out and how do we deal with that?” “There is a question mark about what lurks out there,” he added, because regulators do not have good data on shadow banks’ exposures, something that has inspired the Bank of England’s world first marketwide stress test.
The European Systemic Risk Board, the Bank for International Settlements and global securities regulator Iosco have all called out mounting risks. An overly heavy hand could end up creating yet more uncomfortable and unintended consequences, said a former financial stability policymaker who declined to be identified. “What is the answer?” he said. “Obviously no one wants no market volatility — that’s a bit weird. Also you don’t want the absence of leverage because we wanted that margining for good reason.