Alternative lending was once more commonly known as the shadow lending economy, seen as a backdoor way for individuals and companies to access financing without having to work with a bank. Since alternative lenders have emerged on the public markets and built impressively robust sectors throughout the globe, however, the term “shadow” has been largely abandoned.
Still, there is one major aspect of the alternative lending market that makes it a bit more shady than traditional financing options: a lack of regulation. It’s this missing quality that has led the investment group CFA Institute to call for “standardization, simplification and transparency” of the alternative lending industry.
In a notice published Tuesday (April 27) on the group’s website, the CFA Institute puts forth several suggestions for improving the shadow banking sector within its report on the topic, Shadow Banking: Policy Frameworks and Investor Perspectives on Market-Based Finance (Shadow Banking).
Among these recommendations include increased securitization through standardized legal frameworks across markets to protect creditors. Further, the group is calling for a definitive framework for the reuse of collateral.
The suggestions, the CFA Institute said, are particularly relevant to the European market.
"Amid the myriad of shadow banking policy initiatives, the challenge facing regulators is to achieve coherence in the implementation of these measures and to minimize regulatory gaps and overlaps,” said CFA Institute’s head of Capital Markets Policy EMEA Rhodri Preece. “Shadow banking feeds directly into the capital markets union agenda because there is a desire from the policy perspective for markets-based finance to flourish and deepen the sources of finance available for European companies."
In its survey of investors, the CFA Institute found that the majority of respondents agreed regulation should focus on improving transparency in the industry. More than half (55 percent) agreed that the world needs greater standardization for alternative lending regulations, and nearly half (47 percent) agreed that doing so could effectively mitigate some risk associated with these investments.
Despite the recommendations, the CFA Institute gave credit to the shadow banking market for boosting access to financing. “Nonbank finance has the potential to deliver many benefits to the financial markets in Europe and indeed globally,” Preece said, “if the right measures are put in place to stimulate demand and justify investor confidence."