Out of the Shadows




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Aug 20, 2013
by Louise Hallman
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Out of the Shadows

Salzburg Fellows consider regulation for the non-banking financial sector Session Adjunct Program Director Patrick Kenadjian (center) leads the discussions

Next month will mark five years since what many regard as the start of the financial crisis—the collapse of the investment bank, Lehman Brothers.

Since that fateful day in September 2008, those working in the banking industry have “learnt lessons the hard way”.

Much progress has been made in establishing greater financial stability since then, but much still remains to be done.

It is against this backdrop of stilted progress that this week 53 central, commercial and investment bankers, regulators, academics and other finance experts came to Salzburg Global Seminar for the session ‘Out of the Shadows: Regulation of the Non-Banking Financial Sector’.

The session is being chaired by Sarah Dahlgren, Head of the Bank Supervision Group at Federal Reserve Bank of New York, and returning Fellow, Douglas Flint, Group Chairman of HSBC Bank Plc in London.

Following on from last year’s session ‘Financial Regulation: Bridging Global Differences’, the three-day program opened with a progress review and an update on implementation and implications of regulatory reforms, in particular with regard to systemically important financial institutions and their cross-border operations.

Over the next two days, participants will focus on this year’s special topic—the risks posed to financial markets by the non-bank financial sector, or “shadow banking”.

According to the Financial Times, shadow banking is: “The system of non-deposit taking financial intermediaries including investment banks, hedge funds, monoline insurance firms and other securities operators.”

But shadow banking remains a much-disputed term. Those working in the non-banking financial sector view the term as pejorative, preferring the terms “parallel banking” or “market-based banking”.

They insist that there is nothing that the sector does which is “shadowy” or “obscure”, or even novel. There is even dispute as to what institutions the term covers.

In addition to establishing exactly what they mean when discussing shadow banking, the participants, many of whom are returning Fellows from previous finance and economics session, will explore the following questions:

  1. Should banks be able to conduct operations in the shadows?
  2. Should non-bank institutions be able to operate as if they were banks?
  3. How systemically relevant are shadow banking institutions?
  4. How much non-bank credit intermediation do we want or need?
  5. What are the main trade-offs that need to be addressed in the regulation of non-bank institutions?

In typical Salzburg Global fashion, the session brings together a wide range of participants from the banking sector and those interacting with it.

As well as very senior, established leaders in the industry—such as returning Fellows Flint; Andreas Dombret, Member of the Executive Board, Deutsche Bundesbank; and David Wright, Secretary General, International Organization of Securities Commissions in Madrid; and other session Faculty members, such as Steven Maijoor, Chairman, European Securities and Markets Authority (ESMA) in Paris; Joanna Cound, Managing Director for EMEA Government Affairs & Public Policy at BlackRock, the world’s largest money manager, based in London; and MEP Sharon Bowles—participants in the session also include much more junior, emerging leaders, who will be the decision-makers in years to come.

This session is the third in Salzburg Forum on Finance in Changing World, which was launched in 2011 with the session ‘New Rules for Global Finance: Which kinds of regulation are useful and which are counterproductive?’.

The report from the second session, held last August, ‘Financial Regulation: Bridging Global Differences’ is now available in our Issuu library for easy online reading.

A full report from this year’s session will be published in due course.