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Turner wants radical shake-up of shadow banking regulation

FSA chairman Adair Turner has called for radical reform of regulation of the shadow banking industry, warning that the risks posed by the sector have not gone away.

Speaking at the Cass Business School in London last week, Turner said regulators face a challenge in developing policy to regulate shadow banking.

Shadow banking refers to the trades and flow of funds that occur outside the normal banking sector and includes hedge funds and money market funds.

Turner said: “We need to understand shadow banking not as something parallel to and separate from the core banking system but deeply intertwined with it.”

He said that estimates which were published last year put the total size of the US shadow banking market at $20trn to $25trn and the European shadow banking market at between $13trn and $22trn.

The Global Financial Stability Board, led by Turner, is looking at proposals such as minimum haircuts and margins for secured lending.

Turner said: “The way in which shadow banking contributed to financial instability reflected and still reflects fundamental developments in our financial system which are relevant to banks as much as to shadow banks, which remain important today and could produce new problems in the future.

“We should not take the decline in some specific indicators of shadow activity which has occurred since 2008 as suggesting that the risks have gone away.”

Hudson Green & Associates principal Ian Hudson says: “Turner is absolutely spot on in that shadow banking forms part of the grease of the econ-omy but it is difficult to regulate a market when you do not know the scale of the activities involved.”

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