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
Shadow banking has been top of Australian regulators' agendas
since the Financial Stability Board released its
policy recommendations on shadow banking in November
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, wouldnt sit easily with
Australias 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.
Australias 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
The proposals contemplate that theres a halfway
house where there are potentially fundraisers outside the
banking system subject to capital and liquidity
requirements, Lowden said.
He added that its 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, its difficult to see where it will stop short of
full banking prudential regulations.
Prudential supervision just isnt simple,
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
doesnt reach into the wholesale space.
But there are some precedents that Asic should not follow.
Lowden said that theres been some discussion that New
Zealand is providing precedent for rules on shadow banking
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 Australias
dont, Lowden said. I wouldnt want to
see debenture issues by those vehicles restricted, and it could
run counter to the push to foster retail debenture issuance by
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