A lobby group for the world's largest banks warned Monday that regulators across the world risk pushing more financial activity into unregulated and non-transparent market niches, creating more of the risks that they meant to tackle.
"There could well be a significant expansion of non-bank financial activities as a direct result of the increasing level of banking regulation that we are now seeing," Charles Dallara, outgoing managing director of the International Institute of Finance said in a statement accompanying the report. "It will be important to monitor the implications of this for systemic risks."
The warning comes at a time when governments seem increasingly willing to listen to some of the banking industry's concerns, afraid that the regulations they have introduced since the financial crisis of 2008 is stopping their economies from growing. In Europe, classical bank lending to households and companies is running at rates far below historical norms almost everywhere.
The Bank of England last week announced it would loosen its liquidity requirements on U.K. banks, while the European Union as a whole is adopting legislation that will significantly soften the impact of the Basel III accords on bank capital and liquidity.
The IIF's warning also comes as the Group of 20 leading economies meet in Mexico to review, among other things, the progress of the new regulatory agenda that they embraced after the financial crisis in 2008.
The G-20's regulatory task force, the Financial Stability Board, is looking at steps to make "shadow banks" more transparent and is due to make recommendations to the G-20 by the end of this year.
The term "shadow banking" is generally applied to activities that intermediate savings and credit, but which are legally structured so as to avoid the — often expensive — regulations that apply to banks. Classic examples of 'shadow banks' include money-market funds, conduits and other 'special purpose vehicles.' There is now widespread acknowledgement that, before 2008, banks managed to conceal the extent of the risks they were taking by channeling much of their business through such entities.
The IIF report largely endorsed the FSB's approach to the subject in saying that it was more important to categorize and monitor types of activity, rather than set rules for types of entity. However, It urged taking a nuanced view of what constitutes a 'shadow bank,' and avoid slapping heavy and uniform burdens on all of them equally.
Andres Portilla, regulatory affairs director for the IIF, told a conference call that the authorities shouldn't underestimate the value of 'shadow banks'.
"They do provide very substantial benefits to the economy at large when…clearly there is a risk of limiting the ability of banks to support the economy," Portilla said. "Other forms of financial intermediation might have to come forward to fill the gaps."