Bloomberg News

Regulators Must Rein In Banks Gaming Capital Rules, FSB Says

October 27, 2011

Oct. 28 (Bloomberg) -- Regulators must find ways to rein in banks that seek to shift risks off their balance sheets and minimize the amount of capital they need to hold, the Financial Stability Board said yesterday.

A report from the FSB, which brings together regulators and finance ministries from the Group of 20 nations, said that “bank-sponsored shadow banking entities” may create “an opportunity for regulatory arbitrage.” The Basel Committee on Banking Supervision, a separate policymaking group of global regulators, will report to the FSB with recommendations by July.

“The key aim is to enhance transparency and to limit the support banks provide to shadow banking entities that are not under appropriate prudential measures,” the FSB said in its report.

The shadow-banking system had liabilities of about $16 trillion in the first quarter of 2010 and has contributed to real estate asset-price bubbles, according to a report by the Federal Reserve Bank of New York last year. FSB Chairman Mario Draghi said in April that the board would enlarge “the regulatory perimeter” to include the “most important segments” of shadow banks.

The board also recommended setting tougher global limits on how much banks can invest in the shadow-banking system, which includes mortgage insurance companies, money market funds and some credit hedge funds.

Limiting banks’ potential for losses from these units would “lower the risks to the system from such entities encountering severe stress or failing,” the FSB said.

The FSB said that more work needs to be done to regulate repurchase agreements and securities lending within the shadow- banking system and to ensure banks keep hold of some risk when dealing in securitizations.

Financial Stability

Central banks and finance ministries must be mindful of wider consequences in the financial industry when they make their policies, according to a separate report published yesterday by the FSB, the International Monetary Fund and the Bank of International Settlements.

The organizations need to work closely with banking supervisors “to promote coherence in the application of all policies that have a bearing on financial stability,” the groups said.

The report is a response to a request from G-20 leaders last year to research ways of managing systemic risk in the global financial system.

--With assistance from Jim Brunsden in Brussels. Editors: Peter Chapman, Heather Smith

To contact the reporters on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net

To contact the editor responsible for this story:


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