How regulators are using banks to remove shadow banks

(Reuters) – The Federal Reserve has proposed antiquated rules that could allow it to bundle granular information about bank promotions into shadow banks, a development that shows regulators are aware of the dangers there and the limitations of that approach. How do you want to understand?

Shadow banks, an umbrella term for non-bank financial institutions such as non-public finance and loan service providers, are lightly regulated and regulated.

Regulators and business professionals have expressed growing concerns about systemic threats that may be lurking particularly in boxes like lending to non-public credit scores and non-public finance as interest rates remain higher for longer than the market expects. Lives. Shadow banks have proliferated because regulations have made it expensive for banks to hand over certain boxes.

Nowadays, I’m asking legal professionals, bankers and others what US regulators are doing to deal with such threats.

One banker said regulators are asking his company, a major Wall Street bank, to quality its overall performance for individual companies that experience huge banking operations like fat private equity firms. They also want to know whether the financial institution is lending to corporates the portfolio of such finance, noted the banker, who asked to speak anonymously.

Around June 21, the Fed published an in-the-weeds rule swap proposal that would essentially allow it to package more or less data from major banks in a more detailed and structured way.

The regulator wants banks to continuously report to it graphic details about their loans to shadow banks, including things like the type of entity, the collateral old for lending and the way it is valued. The regulator will also need to understand whether the company to which the bank has given loan is owned by the financial sponsors or not.

A Substack newsletter, known as the Locker Reg Weblog, first reported the proposal.

Despite those efforts, alternatively, regulators will remain neglectful of vast areas of the sector. For example, the Fed estimates that the total exposure of US banks to non-depository financial institutions will be $2 trillion at the end of 2022. According to data provider Preqin, personal credit scores are now a $1.5 trillion market.

Chip McDonald, an Atlanta-based monetary products and services lawyer, said regulators want to complement more recent actions that may be similar to banking. MacDonald noted, “There’s been a lot of talk about it, but I’m not sure this proposal will answer the questions.”

The problem is not the fault of the regulators. The chairman of Europe’s banking watchdog told my colleagues in closing time that regulators face data “black holes” that can only be fixed through required disclosure, pointing to a process that would Can take away years.

the story continues

The G20’s Monetary Balance Board is collecting information on shed banks and their relationships with lenders. Reuters reported in December that England’s locker had also asked banks to record personal credit exposures.

However, it is unclear how these efforts are linked across different jurisdictions and regulators. For example, the Fed’s information collection exercise is fueled by a once-a-year stress test that looks at banks’ ability to withstand financial shocks.

detailed information

In its proposal, the Fed said that the expansion of shed banks poses a risk to banks, but that a lack of knowledge hinders its “ability to consistently measure, monitor, and model the risks posed by these exposures under stress.” Is.

The proposal seeks to address this problem through the discovery of additional “detailed information” on lending to shadow banks, which collects graphic, loan-level information for stress checks. The secretive methods known as FIR-14 for monitoring and assessing financial stability risks are also largely outdated around the Fed.

It will probably be the end of time or the first quarter of 2025 for information to start coming in, as the Fed will have to go through a comment period and finalize rules of thumb. He should then decide how to incorporate the ideas into his annual stress test going forward.

no option

Meanwhile, the dangers are only increasing as the economy slows and business models that rely on ultra-low interest rates adjust to a more normalized situation. Some will not produce it.

For example, private equity company Vista Fairness is in talks to hand over control of its corporate Pluralsight to non-public credit lenders, within the first primary debt restructuring of a company borrowing from shed banks.

Andrew Mettrick, master of the Yale Finance School and director of the university’s program on fiscal balance, said he had not seen anything better.

“Looking at the banks can help you. It’s the main pivot of the system,” Metrik noted. However he said regulators “need to worry about how private lending interacts with many things, not just banks.”

(Reporting by Paritosh Bansal; Edited by Anna Motivational)