Shadow banking: G20 taking their time, EU financial lobby acts

By Markus Henn, WEED

The reform of shadow banking remains open at the international and EU level.

The G20 and its advisory body, the Financial Stability Board, are shaping the final recommendations for some important shadow bank activities. There were rumors that the Australian G20 Presidency last year wanted to declare the financial reform agenda accomplished. But other governments pushed to keep financial reforms on the agenda. Reforms on shadow banking are expected to be completed by 2016 – just about ten years after the start of the crisis.

G20 Shadow Banking Roadmap

The G20 Finance Ministers and Central Bank Governors, in their 9-10 February meeting Communiqué(opens in new window) , endorsed the G20 Shadow Banking Roadmap(opens in new window) . It mainly supports the ongoing work of the G20’s advisory body, the Financial Stability Board (FSB), and that of the securities supervisors’ global body IOSCO. The FSB will deal with the following:

• Information sharing (till first quarter of 2015): Address data gaps through comprehensive information sharing, particularly in areas where cooperation on regulation is difficult.
• Reducing risks (till second quarter of 2015): Finalise the proposal for numerical “haircuts floors”. When securities financing transactions take place, e.g. if a bank lends securities to another bank, the value of the collateral that accompanies the loan will be automatically reduced, e.g. to avoid the risk that the value of the collateral will not be sufficient in times of crisis.
• Global securities financing database (till end of 2015): Complete the development of standards and processes for global securities financing data collection and aggregation.
• Regulating re-use of collateral (till end of 2015): Prepare its final findings on how to harmonise regulation regarding the re-use of client’s collateral and review possible financial stability issues related to such asset collateral re-use.
• Review the policies taken by the G20 governments in different areas (over the year 2015).

Despite some missing final decisions at the international level, particularly on the value cuts for collateral, the European Commission already proposed laws on money market funds(opens in new window) and securities financing transactions(opens in new window) .

However, one year ago, the financial lobby managed to delay the money market reform in the responsible ECON committee so that it could not be concluded before the EP elections. In late February 2015, the committee took its final position – and caved into the pressure of the financial lobby. The Commission’s draft was further weakened. Even the Commission’s proposal to introduce a capital buffer of 3% to be held by money market funds was removed as a general rule and will only apply to a newly branded category of funds after five years, as the Green fraction in the Parliament complained(opens in new window) .

They also fear that the law might not even be in line with the FSB’s recommendations on money market funds and could possibly fail the FSB review. In any case, the decision will not help to curb shadow banking. Now the Council of Finance Ministers has to take a position on the law before the final trilogue negotiations can begin.

The second proposed law deals with the reporting and transparency of securities financing transactions. The problem with the draft was that it primarily focused on transparency, only adding a rule that the person whose security is lent by his/her bank to a third person will have to provide his/her permission first. However, the draft lacks a haircut provision, as it is currently being developed by the FSB.

Therefore, in his draft report on 22 December 2014, the Social Democratic ECON Rapporteur Renato Suro proposed to close this loophole and include a haircut regime to be detailed by the Commission. He also proposed rules on the re-use of collateral, such as details on the calculation methods. The ECON made its decision(opens in new window) on 24 March – and the conservative-liberal majority voted against the Rapporteur’s amendments. The Permanent Representatives of the Council of Finance Ministers already took the Council’s position(opens in new window) on the law proposal in November 2014, also just calling for more transparency. Now, the final trilogue negotiations by Council, Parliament and Commission can begin.