American Banker on FSOC and Shadow Banks
In the article, "How Regulators Can Stop Shadow-Boxing with Shadow Banks," American Banker looks at the latest developments from the Financial Stability Oversight Council (FSOC). "The financial industry and its regulators are stuck in an outdated debate as they continue to spar over which firms are so big that they should be overseen by one or more regulators. The latest round took place when the Financial Stability Oversight Council hosted a public conference in late May. Panelists discussed the question of whether certain asset management firms should be designated under the Dodd-Frank Act as systemically important financial institutions -- so-called SIFIs -- and thus be regulated by the Federal Reserve," writes author William Shirley, counsel at Sidley Austin. "This is the wrong question to ask. In the era of shadow banking, regulators should focus not on which asset management firms to regulate, but on which asset management activities. Put another way: Regulators make a mistake when they target shadow banks. They should focus on shadow banking." He continues: "For example, we end up with a perfect storm of misunderstanding when we debate whether the FSOC should designate asset management firms as SIFIs, which inevitably leads to a debate about how we would then apply regulatory capital requirements. Capital requirements make little sense when applied either to the biggest mutual funds, which borrow little or no money to start with, or to asset managers with the greatest amount of assets under management, which are not liable for the obligations of the funds they manage." Shirley adds: "The fact is that today we effectively create deposits through money market mutual funds; money market mutual funds lend large amounts of money to securities firms to finance securities portfolios; and securities in those portfolios are issued by securitization vehicles that hold loans and mortgages that banks once held. Given this extraordinary economic ecosystem, it is a mistake of habit to approach regulatory challenges in an entity-centric fashion. This may have worked when the economy's ebb and flow was bounded by the shores of the banking world, and regulating banks was equivalent to regulating the economy as a whole. But this is no longer the case, as the entities engaged in shadow banking are too diverse. Identifying these firms by their size alone does not ensure that we capture systemically important economic activities. Forbes also dove into the debate in a June 19 article, "What Happens if Investment Funds are Labeled Too Big To Fail?."
