The Bank for International Settlements (BIS), a forum for the world's central banks, wants specific regulations that were introduced after the 2008 financial crisis to also be extended to shadow banks and FinTech firms.
According to Reuters, the regulation in question is “macroprudential” policy, which requires banks to build up separate “countercyclical” buffers of capital that can be released if loans begin going bad and maintain the financial system’s resilience to shocks.
But in its annual report, the BIS warned that the tools in place might not be enough to handle the risks associated with other financiers, such as asset management funds (also known as shadow banks), because they also offer credit.
In fact, that business has grown significantly since the financial crisis, with shadow banking from open-ended bond funds, hedge funds, money market funds and other types of funds rising 7.6 percent to $45.2 trillion in 2016.
“As current macroprudential measures focus mainly on banks, they may be less effective in dealing with risks arising from the market-based financing that has become more prevalent post-GFC,” the report stated. “Similarly, financial innovation and the application of new technology to the financial industry may shift the nature of risk, requiring a new set of policy responses and an expanded arsenal of instruments.”
Some regulators have already taken steps to address this in their own countries. For example, the U.S. Securities and Exchange Commission (SEC) last year implemented new rules requiring open-end mutual funds and exchange-traded funds to establish liquidity risk management programs. The Bank of Mexico and France’s markets regulators have also followed suit.
“The growing importance of asset managers and other institutional investors in both domestic and cross-border financial intermediation requires national authorities to monitor potential systemic risks from these activities at both the national and global levels, and to consider how best to employ macroprudential approaches to deal with such risks,” the BIS said.