G20 Targets ‘Shadow Banks’ With Regulations To Be Ready By September 2012

MEXICO CITY/LONDON, Nov 5 (Reuters) – International  watchdogs, working to tighten-up global regulation after the  financial crisis, are moving ahead with plans to extend their  reach to “shadow banks” such as money-market funds that handle  trillions of dollars in short-term investments.

Policymakers have already tightened regulation for  mainstream banks but are keen to stop higher-risk activities  shifting to less supervised areas such as off-balance sheet  units, hedge funds and money-market funds, which contributed to  the crisis.

This is a clear signal there will be no let up for the  financial sector despite warnings that introducing too many  rules could hinder global economic recovery.

The Financial Stability Board (FSB), a task force from the  world’s top 20 economies (G20), told the group’s finance  ministers gathered in Mexico on Monday the new rules for what  some also call “parallel” banks would be ready in September.

“The approach is designed to be proportionate to financial  stability risks,” FSB Chairman Mark Carney wrote to G20 finance  ministers. He said the aim was to focus on activities that were  material to the financial system and to make use of lessons from  the last crisis.

He wants to reduce the susceptibility of money market funds  to “runs” as seen in the early part of 2007-2009. The FSB will  publish draft rules for consultation shortly.

The FSB is struggling to keep on track implementation of a  whole series of rules already agreed by the G20 and some  deadlines are slipping.

“The key determinant of the effectiveness of reforms is  whether they are implemented in a timely, consistent and  complete manner,” Carney said.

For example, the world’s top 28 banks will get another six  months to June 2013 to show how they can be wound down in a  crisis without wreaking the havoc caused by the collapse of  Lehman Brothers in 2008.

This delay was due to “uneven headway” made so far,  highlighting the difficulties regulators face in following  through on pledges the G20 made in the aftermath of Lehman.

Also, the United States and European Union are set to miss a  January deadline to implement new bank capital rules – known as  Basel III, the G20’s main response to the financial crisis.

Progress is also slow on cutting the financial sector’s  reliance on credit ratings for investment decisions or for  calculating how much capital banks should hold.

As a result, the FSB has tried to speed things up by telling  global banking regulators to identify proposals by the end of  this year to trim the use of ratings and implement them by  January 2016. National supervisors must implement alternatives  to ratings by the end of 2015.

The G20 is still trying to stop banks becoming “too big to  fail”, which covers banks the markets believe would be bailed  out in a crisis.

Carney, also governor of the Bank of Canada, suggested that  G20 ministers could request a full assessment next September on  whether further action was needed on this issue.

The FSB also set out a timetable for extra scrutiny of  second tier banks and big insurers.

Important domestic banks will have to hold more capital from  2016, if required by regulators, while insurers deemed to be  “systemically important” in 2017 will have to hold extra capital  from 2019.

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