The shadow banking system needs more transparency – not re-regulation – to help prevent future financial turmoil, says a study published today by the C.D. Howe Institute. In “Lifting the Veil: Regulation and Shadow Banking,” authors Christian Calmès and Raymond Théoret conclude that the best way to reform the shadow banking system, where the recent subprime mortgage crisis began, is to lift the veil on risk and leverage taken on within banks.
The growth of shadow banking in recent decades has changed the concept of banking, note the authors. It has meant less deposit-taking and lending and more market-oriented banking activities, including in particular a growing trade in securitized products. But shadow banking is opaque; a problem underlined in the recent financial crisis.
Did the financial crisis and its links to banks’ riskiness show that bank re-regulation is necessary?
In the Canadian context at least, better reporting of bank risk seems to be a more appropriate way than re-regulation to prevent financial turmoil from arising in this area, say the authors. Market-oriented operations should be more exposed to daylight, to enable a better evaluation of true bank risk, and regulatory agencies should require detailed reports on activities generating noninterest income. Better indicators of leverage need also to be developed, they say, owing to leverage’s role as the principal channel of bank risk-taking.
For the study go here:
For more information contact:
Christian Calmès, Chaire d’information financière et organisationnelle, ESG-UQAM ; Member, Laboratory for Research in Statistics and Probability, LRSP; and Professor, Université du Québec (Outaouais).
Raymond Théoret, Professor, Université du Québec (Montréal), School of Management; Associate Professor, Université du Québec (Outaouais); Chaire d’information financière et organisationnelle, ESG-UQAM.
Philippe Bergevin, Policy Analyst, C.D. Howe Institute, 416-865-1904; email: cdhowe@cdhowe.org.
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