Shadow banking regulation

The shadow banking sector has been in the news lately due to high-profile collapses such as Archegos Capital and Greensill Capital. While many agree that action needs to be taken, so far there has been little change.

One reason for this inaction is the complexity of the shadow banking sector, which can make regulation difficult. However, the risks of inaction are significant, as demonstrated by the fallout from the collapse of Archegos Capital.

There needs to be greater transparency and oversight, including clearer rules around complex financial instruments and more scrutiny of leverage.

Regulators and industry players must work together to develop effective regulatory frameworks that promote innovation and growth while ensuring stability and safety. This requires a coordinated approach taking into account the global nature of this sector. There is a need to develop an effective solution on providing better scrutiny of the leverage being used by some of the industry players.

The risks are known to the FCA for each regulated firm in the 'shadow banking sector'. Returns for these firms are regularly submitted to the regulator and all these firms are obliged to have risk surveys in place and report on the appropriate ratios that these risk analyses drive. The information is there for the FCA to analyse and, if the FCA had any concerns, they could swiftly follow up, probably reducing any potential impacts. Sadly, the FCA seem a little under resourced at the moment both in staff numbers and in the depth of experience that this type of 'hands on' analysis would require.

The shadow banking sector performs an important role in enabling banks to provide a higher amount of lending than would otherwise be possible. To be clear without it we would be looking at significantly constraining business activity at a time that we really need business growth. Does it carry risk, of course it does but when we are talking about the Shadow Banking sector we are talking about a wide range of organisations utilising a range of financial instruments, many of which are very resilient even in volatile markets.
Whilst some would have you believe this is the wild west of finance, the reality is that much of the shadow banking sector is already regulated both here and in the EU.
But regulation does not prevent business failure, nor should it, as if it did it would mean the removal of risk and with that the potential for returns that our markets rely upon.