Regulation & ComplianceRegulators crack down on shadow banking sector

Regulators crack down on shadow banking sector

From the end of 2015 non-banking institutions such as hedge funds and private equity firms will have to provide a minimum level of collateral, such as stocks or bonds, when borrowing money from banks.

From the end of 2015 non-banking institutions such as hedge funds and private equity firms will have to provide a minimum level of collateral, such as stocks or bonds, when borrowing money from banks.

This is part of a cracdown that global regulators have launched against shadow banking, the BBC reports.

The Financial Stability Board (FSB) said banks would have to impose a discount of at least 6% on the securities they receive from non-banks in exchange for a loan.

FSB chairman Mark Carney said the change addressed “the level of risk taking in the core funding markets”.

“It has been carefully developed and marks a big step forward in the FSB’s overall work programme to transform shadow banking into resilient market-based financing conducted on a sound basis,” he added.

These changes aim to avoid a repeat of the excessive lending that led to the 2008 financial crisis. The latest six-monthly IMF Global Financial Stability Report said that the shadow banking system had grown to be roughly the same size as the traditional banking system.

It warned its size could present a challenge to regulators trying to prevent a repeat of the financial crisis.

For the moment, the new rules only apply to transactions between banks and non-banks. But the BBC reports that the FSB said it was consulting on applying the same rules to deals between non-banks.

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