Shadow lenders now hold half of all financial assets according to new data from a project launched to gather information from the banking system.
Hedge funds’ significant investments in US Treasuries are now under increased scrutiny as the Financial Stability Board (FSB), a leading global financial regulator, considers a detailed investigation into these lucrative trades.
After encountering challenges with a major initiative launched last year to collect data on the extensive shadow banking sector, the FSB is contemplating a shift in focus to prioritize specific areas, including “basis trades,” according to sources familiar with the discussions.
These trades involve some of the largest hedge funds attempting to capitalize on minor price discrepancies between Treasuries and their derivative counterparts, known as futures, which have recently reached a staggering $1.15 trillion in wagers.
Some FSB officials believe that concentrating on specific issues could yield better results than the broad data-gathering effort initially planned. Challenges in the current project include understanding what data various global regulators possess, the extent to which they can share this information, and what additional data can be collected.
Concerns are also rising about private assets, particularly regarding inflated valuations, excessive leverage, and inconsistent governance, which may prompt more focused regulatory efforts.
Tajinder Singh, acting secretary general of global securities at the International Organization of Securities Commissions (IOSCO) and a participant in the FSB, emphasized the need for targeted areas of investigation, including private finance.
Singh noted that IOSCO had previously warned that private markets were becoming complacent regarding growing risks.
Jean-Paul Servais, chairman of IOSCO, highlighted the importance of understanding what data is necessary and evaluating existing information.
He expressed optimism that solutions could be found, stating, “We are richer than we expect; a lot of information already exists; it’s about aggregating it.”
The FSB, which was established after the financial crisis to help mitigate future risks, has also refrained from commenting on specific internal discussions.
The organization is particularly focused on non-bank financial institutions, which now control half of the financial assets globally, as regulators seek to manage risks in this rapidly expanding and less-regulated sector.
National authorities, such as the Bank of England, are also working to gather data on these institutions.
The Bank plans to announce findings from a “System Wide Exploratory Scenario” that aims to assess the potential impacts of hypothetical economic shocks across the financial system.
This data collection is an essential step toward developing policies that aim to reduce risks, though the FSB has noted diminishing political support for new financial regulations.
Servais urged the non-bank sector to participate in these data-gathering initiatives, stating, “Don’t refuse the debate about data. If you want to avoid a one-size-fits-all approach, we need data.”
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