A selection of quotes from comment letters to the FSB on Shadow Banking (Finadium subscribers only)

Reading the public responses to the Financial Stability Board’s Shadow Banking consultation paper provides an important view into the thinking of major banks and international organizations on Shadow Banking. Below are a selection of quotes we found compelling.

“We commend to the Board a principles-based approach; one that promotes global consistency in the regulation of systemically important markets; provides guidance to domestic regulators in assessing, measuring and regulating risks; and enables nuanced regulation that effectively targets risks that are specific to markets.” – Australian Financial Markets Association

“As the BIS Committee on the Global Financial System (CGFS) has already reported,1 the drop in liquidity during the financial crisis was driven by traditional reactions to heightened risk perceptions, as is the withdrawal or contraction of credit lines. Clearly, a minimum mandatory haircut would not stop this type of response, a point conceded by the CGFS itself. Accordingly, serious doubts are raised on the effectiveness of proposed measures on haircuts (mandatory more stable and high haircuts, subject to a minimum) in order to mitigate in a substantial way the observed procyclical behavior of these markets.” – BBVA

“BlackRock recommends that the term “shadow banking” be used only to refer to certain off balance sheet structured finance entities sponsored by banks (principally, term finance entities such as securitizations). This would appropriately focus regulatory attention on the area that gave rise to some of the greatest systemic issues during the financial crisis of 2007 and 2008. Bank risk managers apparently failed to provide for housing declines in their potential loss calculations and then had limited capacity to adjust these structures to reflect actual losses as, generally, they had fixed haircuts and credit enhancements.” – BlackRock

“Duplication or conflict must be avoided and the scope of application of the proposed recommendations needs to be carefully tailored… the Basel III Leverage Ratio places a limit on banks’ balance sheets, directly affecting the extent to which secured borrowing can be undertaken. These rules should not be unnecessarily undermined or duplicated by additional measures designed to address the non-bank sector” – Deutsche Bank

“Regarding the securities lending and repo markets, we would like to emphasize that a large percentage of this activity is undertaken by regulated institutions. As such existing regulation may deal with some of the risk concerns highlighted by the FSB in its shadow banking review. We support a harmonised global approach to the high level regulation of the securities lending market and for the provision of related data, as there may be inconsistency and uncertainty if different requirements are established at a local level…. We would suggest that a sensible approach for ensuring that securities lending does not give rise to financial stability risk is to focus initially on developing further transparency and disclosure (including for the reinvestment of cash collateral), and to establish high level global principles governing collateral management more broadly.” – International Securities Lending Association (ISLA)

“We support the proposal to introduce minimum regulatory haircuts. In the case of cleared repos, every direct participant has a bilateral relationship with the CCP and is subject to a minimum effective haircut implied by the CCP’s initial margin level. We believe that the same discipline should apply in the case of repos that are not cleared by CCPs, i.e. where participants have direct exposure to one another.” – LCH.Clearnet

“We have serious reservations regarding the implications of binding numerical floors on collateral haircuts in the securities lending and repo markets. As an initial matter, we question the appropriateness of measures that would seek to dictate the negotiated terms of market transactions, especially transactions between regulated counterparties. In addition, we note the broad imprecision inherent in binding numerical floors and therefore the potential dramatic overstatement of risk. Among the most significant structural limitation of numerical floors is their failure to account for the correlation which exists between securities lent and securities received…. As an alternative, the FSB may wish to promote the general principle that the risks of securities lending and repo transactions must be appropriately taken into account by all market participants, whether in or outside of the traditional banking system.” – State Street

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