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The financial crisis has also shown the shortcomings of the system. ICMA shares concerns that lack of transparency is a problem as this can hide risks to market participants. The overall level of risks should remain appropriate and adequately disclosed to prospective investors. Greater transparency within the structures themselves is required so that investors can make more informed decisions. ICMA believes positive regulatory steps have been taken to address transparency.
However, ‘shadow banking’ contains pejorative connotations. In fact, shadow banking is an alternative term for market finance. It is market‐based because it decomposes the process of credit intermediation into an articulated sequence or chain of discrete operations typically performed by separate specialist non‐bank entities which interact across the wholesale financial market. Shadow banking also relies on active secondary markets in order to be able to price assets and relies on the wholesale financial market for funding. The use of the ‘shadow banking term’ reflects the fact that debate has been so far viewed through the lens of banking supervision and the prudential regulatory tool‐kit. It also ignores the fact that many ‘shadow banking’entities and activities are already highly regulated under securities legislation. The AMIC urges the European Commission to use an alternative label – for instance ‘market finance’.
The Council has been particularly interested in the shadow banking topic in light of the Basel III reforms and their direct impact on traditional banking structures, and indirectly on the asset management industry. The AMIC believes that a key step in the ‘shadow banking’ discussion is to clarify the type of activities understood under this term. Regulating different products in the same way in itself creates systemic risk. Moreover, the AMIC would like to ensure that recommendations of regulatory reforms take into account the current regulatory developments and its impact on the asset management industry; and avoid regulatory overlaps considering the work also conducting by the FSB and IOSCO.
Problems may result from dual regulation, whether at an EU and/or global level. The Council in fact recommends a global approach in the definition and identification of shadow banking issues rather than an EU led project. Regulation should not result in the EU becoming uncompetitive. Measures may overlap or conflict with any new regulations, thereby hindering the ability of the EU to respond to the critical need for growth and the ability of financial institutions to rebuild financial stability.