HONG KONG (Reuters) - Shadow banking, a term often associated with murky funding, is emerging as an important source of credit for the real economy at a time when capital-strapped banks are reluctant to lend, regulators told Reuters.
In efforts to prevent a repeat of the global financial meltdown of 2007-2008, regulators and central banks have extended their reach to the huge network of funding channels that operate outside the traditional banking realm.
Yet, regulators should allow new forms of non-bank finance to develop if enough trust can be built in those systems, said Greg Medcraft, board chair of the International Organization of Securities Commissions (IOSCO), a group of more than 100 national watchdogs.
“As markets regulators, we think we should allow markets to do their job to fund the real economy,” Medcraft said in an interview during the Reuters Financial Regulation Summit.
“We welcome innovation in market-based finance, and as long as it is done in a way that investors can have trust and confidence, we are open for business.”
The so-called ‘shadow banking’ sector, estimated at $75 trillion, is in constant evolution and regulators have admitted not being able to reach a consensus on what exactly should fall into this category.
Non-bank lenders can include asset managers, hedge funds and insurers but also, increasingly, new Internet-based financial platforms where borrowers and lenders meet to exchange funds without the need of a bank intermediary.
But labeling these industries simply as ‘shadow banks’ has stymied an informed debate on the subject, say regulators.
“The use of the term shadow banking has made it more difficult to have a good understanding of what we are talking about,” said Steven Maijoor, chairman of the European Securities and Markets Authority, Europe’s top markets regulator.
“Whole parts of the market have been identified as being shadow banking and we need to be careful about taking that view.”
Stringent capital requirements slapped on lenders in the aftermath of the global financial crisis have made banks reluctant to lend to smaller firms, especially at times when the economy is slowing down.
In China, where the economy is growing at its slowest pace in six years, banks are not boosting lending despite multiple interest rate cuts, prompting small entrepreneurs to turn to Internet financing, spurring its growth.
On Monday, for example, Chinese smartphone maker Xiaomi Inc became the latest company to enter China’s booming online finance market with the launch of a new money market fund.
While welcoming the emergence of new forms of finance, markets regulators say they had to be robust.
“We want to make sure that whatever technology is used to originate credit, consumers have the same trust and confidence as getting a loan from a bank,” said IOSCO’s Medcraft.
Asian regulators will have to move fast to keep up with the pace of innovation, not only to manage the risks but also to help promote new lending channels, said Joyce Chan, a partner at law firm DLA Piper in Hong Kong.
“Our regulations have not been updated to cater to these types of businesses,” said Chan.
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Writing by Lisa Jucca; Editing by Muralikumar Anantharaman