02 October 2015

BIS' Noyer: Financial regulation-stability versus uniformity, a focus on non-bank actors

Noyer argues that the Capital Market Union's project is aiming at achieving a sound regulatory framework for the shadow banking sector, and to its end the European Commission has defined criteria for Simple, Transparent and Standardized (STS) securitization along with the EBA.

Speech by Mr Christian Noyer, Governor of the Bank of France and Chairman of the Board of Directors of the Bank for International Settlements and President of the ACPR (Autorité de contrôle prudentiel et de resolution/French Prudential Supervisory Authority), at the ACPR- Bank of France Conference "Financial regulation-stability versus uniformity, a focus on non banks actors"

[...] Regulating the shadow banking system has been and still is, as you know, a major objective for the G20 and the FSB since the 2008 financial crisis. The underlying objective was to prevent regulatory arbitrage and risk transfers outside the banking sector at a time where banking supervision has been considerably strengthened.

Even though this objective is a very legitimate one as far financial stability is concerned, I would like to emphasize two ideas:

(1) The first idea is that a number of pitfalls have emerged along the way. Indeed, consistency should not be mistaken with uniformity of the rules.

(2) And the second idea is that a "one size fits all" approach of shadow banking regulation could lead to unintended adverse consequences.

1. Let me develop the first point: The 2008 crisis illustrated that the so called « shadow banking sector » played an important role in propagating and amplifying financial instability throughout the financial system. Shedding some light on these entities and regulating them to prevent contagion and regulatory arbitrage has been therefore a key milestone of the G20 Financial regulation agenda ever since. The Banque de France has been involved in this policy work from the outset. [...]

2. Coming now to my second point: even though regulatory arbitrage is a risk, consistency between sectors should not be mistaken with uniformity and a "one size fits all" approach could lead to unintended adverse consequences.[...]

Conclusion

As we can see, policy makers have still a lot of work on their plate as regards the design of an adequate regulatory framework for the "shadow banking sector" and for it to be sufficiently sound to be providing a sustainable "market based financing". The Capital Market Union's project launched by the European Commission is aiming at achieving a sound regulatory framework. To this end, for instance, the European Commission with the help of the European Banking Association (EBA) has recently defined criteria for Simple, Transparent and Standardized (STS) securitization. The idea is both to regain investors' confidence in securitization assets, which we must admit still suffers from the US subprime crisis, and to encourage banks to deleverage loans portfolio from their balance sheet to refinance the real economy. By encouraging this new type of securitization, the European Commission is mindful to avoid another subprime crisis.

 

Indeed, rebalancing the financing mix of the EU economy as promoted in the CMU initiative is a valuable objective provided a rightly calibrated regulatory and risk framework is in place. [...]

Full speech

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