G20 economies to put shadow banks on long leash

World leaders are expected to take a softly-softly approach to regulating the so-called shadow banking sector.

Written by Reuters | London | Published: August 26, 2013 2:42 am

World leaders are expected to take a softly-softly approach to regulating the so-called shadow banking sector when they meet in Russia next month to avoid damaging the flow of finance to the global economy.

While governments have cracked down on risk-taking by traditional banks in the wake of the financial crisis,the shadow banking sector,an assortment of financial intermediaries that handle $60 trillion of transactions a year — roughly the same size as the world economy — remains a source of systemic risk for taxpayers.

Such intermediaries,which include hedge funds,money market funds and structured investment vehicles,provide credit to the financial sector,but,unlike banks,have no access to central bank support or safeguards such as deposit insurance and debt guarantees.

They often rely on short-term funding sources,such as the repurchase or repo market,in which borrowers sell the lender a security as collateral and agree to buy it back later at a set time and price.

At their meeting on September 5-6 the Group of 20 economies (G20) will endorse reforms but stop short of rushing through far-reaching changes because of the role shadow banking activities play in providing liquidity to the still fragile banking sector,according to people familiar with the G20’s work.

The G20 has drawn up a list of top global “systemic” banks and insurers who must hold more capital because their size and complexity could lead to market mayhem if they were to fail.

While top firms will be relieved they won’t be singled out,the G20 is likely to brush aside their opposition to a requirement for them to apply a minimum discount — or “haircut” — on the value of collateral they take to cover securities lending and repos.

The G20 may tread carefully by leaving the door open to refinements through public consultation and promises to gather more data before finalising the new rule.

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