Study: Need Shadow Banking Transparency for Healthy Capital Markets
A new study from the CFA institute, “Shadow Banking Policy Frameworks and Investor Perspectives on Markets-Based Finance (Shadow Banking),” makes recommendations for improved transparency and simplification in securities financing, including management of collateral and reforming the securitization market. The study also includes the results of a CFA Institute member survey, which finds 55% of professional investor respondents globally identified a need for greater standardization and simplification of issuance structures in securitization markets.
A new global study on alternative channels for capital from shadow banking–a broad activity relating to all nonbank credit intermediation–provides a unique investor perspective on what it will take for these financing vehicles to take hold and support economic growth. Shadow Banking Policy Frameworks and Investor Perspectives on Markets-Based Finance (Shadow Banking) makes recommendations for improved transparency and simplification in securities financing, including management of collateral and reforming the securitization market. The study also includes the results of a CFA Institute member survey which finds that 55 per cent of professional investor respondents globally identified a need for greater standardization and simplification of issuance structures in securitization markets.
In the wake of the financial crisis, shadow banking, in the form of opaque or lightly regulated financing vehicles, was seen as a potential systemic risk for the finance and investment industry. Against a backdrop of constrained bank lending, markets-based finance is now being viewed as a potential solution to help channel capital to productive enterprises in order to revive the real economy. In the broadest terms, the shadow banking sector globally is estimated to be approximately $75 trillion by the Financial Stability Board.
“Amid the myriad of shadow banking policy initiatives, the challenge facing regulators is to achieve coherence in the implementation of these measures and to minimise regulatory gaps and overlaps,” said Rhodri Preece, CFA, head of Capital Markets Policy EMEA at CFA Institute and author of the study. “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 companies. Nonbank finance has the potential to deliver many benefits to the financial markets globally if the right measures are put in place to stimulate demand and justify investor confidence.”
Key findings include:
- 55% of survey respondents globally identified a need for greater standardisation and simplification of issuance structures in securitisation markets
- 47% of survey respondents globally agree that the risks associated with securities financing transactions would be mitigated most effectively with greater transparency, through reporting of transactions to trade repositories and to investors
- Improving the coherence of the various regulatory measures related to securitization is important; differences in regulation between Europe, the United States and other jurisdictions may impose additional costs without corresponding benefits to financial stability or investor protection.
Shadow Banking examines the perimeter of shadow banking, the entities, activities and components within the shadow banking system, and how they vary across different jurisdictions. The analysis covers the U.S., the European Union, and Asia-Pacific (focusing on China) and illustrates that the concept of shadow banking differs across regions. In developed financial markets, the term is synonymous with “markets-based finance” such as certain types of investment funds and securitization vehicles, as well as activities such as securities financing transactions, while in other jurisdictions, “shadow banking” largely comprises alternative lending channels such as peer-to-peer lending and other forms of nonbank direct loan provision.
The survey of the CFA Institute membership was conducted in April 2014 to obtain the perspective of investment professionals on the risks and policy issues concerning shadow banking. The survey examined issues related to securitization and securities financing in particular, given their relevance to current shadow banking policy initiatives. The response rate was 1.7% with a confidence interval of ±3.89% at the 95% confidence level.