Shadow banking is back in public light. The FT has just started a series on it. On the pages of the same FT, Mark Carney, Bank of England governor and crucially, chairman of the Financial Stability Board (FSB), recently outlined the reforms that the FSB has introduced to transform shadow banking into governable market-based finance:
1. Curtailing the links between regulated and shadow banking.
2. Regulating the two shadow banking markets: better incentives for safer securitization structures (think ABS initiatives by Bank of England and ECB) and minimum margin requirements (haircuts) for securities financing transactions in repo markets.
3. Improved transparency and monitoring.
The reader will be tempted to believe that reform of repo markets, six years after the fall of Lehman Brothers and the run on repo it triggered, is progressing smoothly. This is an important front in the macroprudential battle, according to Carney, because: