Regulators in Asia target shadow banking sector

Regulators in Asia are striving to strike balance between regulating the shadow banking sector and letting Asian financial intermediation develop

Asian regulators are seeking to shine a light on the risks posed by the shadow banking sector, but need to be careful not to cast the net too wide, according to Ashley Alder, chief executive of the Securities and Futures Commission (SFC).

At the Financial Stability Board's (FSB) regional meeting in Seoul in November, shadow banking was a key focus of the discussions. In Korea, for instance, a number of savings banks have been closed down over the past several months, having racked up heavy losses from their investments in project finance - an area that has been hit by a property downturn in Korea. The banks were largely unregulated and lacked adequate capital levels, according to the Korean regulator.

A number of unregulated debenture companies have also collapsed in Australia recently, said Greg Medcraft, chairman of the Australian Securities and Investments Commission - who, along with Alder, was speaking at the Thomson Reuters Pan-Asian Regulatory Summit in Hong Kong this week. Those companies raised funds from retail investors and loaned them out for commercial mortgages.

Capital levels at these companies are typically around 2% compared with Tier I capital for Basel III-regulated firms of 6%. "For retail investors, if a company looks like a bank and acts like a bank, then it should probably be regulated like a bank. That's the challenge for securities regulators," Medcraft said.

Medcraft will take up the chairmanship of the International Organization of Securities Commissions from March 2013, and thinks there should be better overnight of non-bank financial firms in Asia. "There are entities in Asia - funds or corporations that are borrowing short and lending long - that should be better regulated," he said.

However, Alder warned about taking an all-encompassing stance that could restrict Asian firms from obtaining finance, given the differences in the region. "The FSB has a definition of what shadow banking is, but in Asia - for example, Vietnam - there are micro-financing and SME financing structures, which we think should be treated differently or seen in a different way. [They are] not equivalent to the sorts of issues that happened in the West with securitisation and money market funds," he said.

In Hong Kong, the non-bank sector is broad and includes insurers and other financing entities, which are not the same as the shadow banking sector, he argued. "The issue on the table is to define shadow banks in Asia where institutions are at a different stage of development."

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