“Self-regulation sounds like a good idea until it becomes self-delusion, at which point the regulator will be blamed for a lack of action,"
Regulators 'may have gone too far': Medcraft
- Business Spectator
- June 23, 2015
Global financial system regulators may have overreached in some conclusions on the risk levels of market-based finance, ASIC chairman Greg Medcraft has said, as they react to the trauma of the global financial crisis.
Speaking to Washington’s National Press Club overnight in his role as chairman of International Organisation of Securities Commissions (IOSCO), Mr Medcraft said there is a concern the international regulatory community may have gone too far in seeing problems, and underestimated the effectiveness of existing tools to regulate shadow banking, which IOSCO prefers to call ‘sustainable market-based finance’.
“At IOSCO we have grown increasingly concerned about these developments,” Mr Medcraft said, adding that the global regulatory agenda has “for some time” been driven by considerations of financial stability and systemic risk, rather than the role market-based finance can play in funding the real economy.
“The markets we regulate are built on the idea of risk taking -- risk taking which supports wealth creation and economic growth,” he said. “We see regulation as being about ensuring markets accurately and fairly price those risks and that market participants act with integrity … In the markets space, [regulatory tools] should be about conduct supervision and enforcement.”
Tools based on those used for the banking sector won’t necessarily work for shadow banking, and using them as a starting point would be like filling a round hole with a square peg, Mr Medcraft said. Rules on eligible assets, liquidity thresholds, leverage restrictions, stress testing, redemption requirements and knowledge of investor requirements were already effective tools in the asset management sector, he said.
The speech comes as the UK Financial Stability Board considers the possibility of minimum capital requirements for large asset managers it deems “too big to fail”, a prospect which has raised ire from US- and UK-based funds. It is currently consulting on whether the biggest asset managers should be designated ‘systemically important’, which would subject them to the same rules and scrutiny as 30 major global banks and nine insurers.
Meanwhile, the FSB’s Global Shadow Banking Monitoring Report 2014 estimated the size of the global shadow banking sector at $US75 trillion ($A97 trillion). And up to 80 per cent of funds outside the banking and insurance industries are handled by asset managers, broker-dealers and investment funds, the FSB says.
But recent industry evidence was compellingly against the idea that asset managers put financial stability at risk simply by virtue of their size, Mr Medcraft added. “Even during the depths of the financial crisis net outflows from funds were small and certainly not of a scale to impact the broader market," he said. “This reflects the fact that investors in mutual funds are -- by nature and definition -- in it for the long haul and take short-term fluctuations in their stride.”
IOSCO -- whose members are responsible for regulating more than 95 per cent of the world’s securities markets -- will focus its own review of asset management activities and products on the need for better risk data, addressing liquidity management and mismatches, leverage, and understanding risks posed by investment mandates in times of stress.
Meanwhile, regulators should collect evidence in consideration of any problems jointly and collaboratively across all industry sectors, and based on current market observations rather than theoretical assumptions “drawn from academic papers based on what might have happened in the distant past,” Mr Medcraft said.