Australia's shadow banking regulations revealed

Author: Ashley Lee | Published: 28 Jan 2013
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Although there has been a global push towards regulating the shadow banking sector in the last few months, Australia's industry is sceptical of the regulations that could follow, especially in a contracting sector.

Shadow banking has been top of Australian regulators' agendas since the Financial Stability Board released its policy recommendations on shadow banking in November 2012.

Shadow banking describes the non-bank credit intermediaries, including hedge funds and unlisted derivatives. It is, at present, not subject regulatory oversight.

Herbert Smith Freehills’ Patrick Lowden was concerned that shadow banking reforms, such as capital adequacy and liquidity requirements, wouldn’t sit easily with Australia’s current regulatory framework.

Speaking at the Asian Financial Forum in Hong Kong, Australian Securities and Investments Commission (Asic) chairman Greg Medcraft predicted that securities regulators will establish more prudential-type requirements in the shadow-banking area, particularly perhaps strengthening capital requirements to reduce arbitrage between banking and non-banking funding activities.

Medcraft also expected to see more corporate governance regulations: if there is an institution that looks like a bank and acts like a bank, it should have similar corporate governance requirements as banks, he said.

But regulations may not be necessary. In a June 2012 report by the Australian Financial Markets Association (Afma) on the banking sector post global financial crisis, it said that the provision of credit by non-bank credit intermediaries has been in steady decline.

“Australia’s shadow banking sector is small and has experienced continuous long-term contraction, as evident especially in the decline in importance of Registered Financial Corporations, which include money market corporations and finance companies,” it said.

Regardless shadow banking rules may not mesh well with existing regulations. Lowden explained that the present framework includes banking laws in which regulated financial institutions are subject to sophisticated prudential regulation, and the securities law, which applies to all fundraisers and emphasises disclosure so that investors are reformed.

“The proposals contemplate that there’s a halfway house where there are potentially fundraisers outside the banking system subject to capital and liquidity requirements,” Lowden said.

He added that it’s unclear where that will end up. Although it has been touted as a simpler regime that reflects the smaller size of issuers, but once you go down that path, he said, it’s difficult to see where it will stop short of full banking prudential regulations.

“Prudential supervision just isn’t simple,” he commented.

It is also essential that the regulators specify which part of the shadow banking market must be regulated. Lowden said that most of the public comments have regarded regulating the retail space, and we hope that is where it ends: we hope it doesn’t reach into the wholesale space.

But there are some precedents that Asic should not follow. Lowden said that there’s been some discussion that New Zealand is providing precedent for rules on shadow banking vehicles; the Reserve Bank of New Zealand implemented risk management guidelines for non-bank deposit takers in July 2009.

“New Zealand rules currently prevent issuance by corporate treasury vehicles, while Australia’s don’t,” Lowden said. “I wouldn’t want to see debenture issues by those vehicles restricted, and it could run counter to the push to foster retail debenture issuance by Australian corporates.”

Related links:

FSB reveals shadow banking policy options

Shadow banking: are the shadows really the banks?

FSB shadow banking head reveals policy options

Shadow banking: what regulators must do