The Shadow of Shadow Banking

Forget SEC registration. Forget the AIFMD. Forget the Short Selling Directive. Cooconnect.com writes that the regulatory steps that could do more to change the hedge fund industry than any others have only just reached the bottom the legislative agenda. They are the measures now being contemplated by the G20 to tackle what has become known as “shadow banking.” This is a slippery concept, and a moving target to boot, but almost any definition of “shadow banking” will include the ways in which investment banks fund themselves and then use that funding to finance their hedge fund clients.

A Financial Stability Board (FSB) paper published in April this year, entitled Shadow Baking: Scoping the Issues, noted that “there is as yet no commonly agreed definition.” Its own attempt at a useable definition for regulators, which consumes half the ten page document, might be summarised as any forms of lending (or promises to lend) by any organisation outside the regulated banking sector that creates systemic risk or opportunities for regulatory arbitrage, particularly if long term assets are being funded by short term liabilities, and those assets are securitised and/or re-hypothecated.

That sounds a lot like a system in which investment banks fund themselves…

Read more at http://www.cooconnect.com/opinion/details/2011/7/8/the-shadow-of-shadow-banking/13