CFA Institute Calls for Standardization & Transparency in “Shadow Banking” Sector

Orson Welles as the ShadowThe CFA Institute seeks to lead investment professionals around the globe promoting high standards in ethics and professional excellence. The organization claims over 130,000 members in 147 different countries.  As the traditional financial industry plods along, new forms of finance have leveraged technology to innovate cumbersome processes to improve services for both investors and those in need of credit.

The CFA Institute recently stated;

“In the wake of the financial crisis, shadow banking–in the form of opaque or lightly regulated financing vehicles–was seen as a potential systemic risk for the finance and investment industry. Against a backdrop of constrained bank lending, markets-based finance is now being viewed as a potential solution to help channel capital to productive enterprises in order to revive the real economy. In the broadest terms, the shadow banking sector globally is estimated to be approximately $75 trillion by the Financial Stability Board”.

To address the need for “transparency” and “standardization”, the CFA Institute has published a report on the “Shadow Banking” world.

The CFA Institute states that these alternative lending channels include a variety of nonbank loan companies, microfinance companies specialising in credit provision to small enterprises, trust companies, peer-to-peer lending, and various forms of retail-oriented loan provision.  While noting intrinsic benefits to the financial sector, they are concerned about potential risks.

CFA Institute proposes:

  • To support transitioning towards a variable net asset value (VNAV) pric- ing model for all money market funds over an appropriate time period that should be long enough to allow investors and fund sponsors to adjust investment policies and mandates accordingly.
  • Securitisation policy initiatives should focus on (i) increasing standardisation and simplification of issuance structures and (ii) improving transparency via initial and ongoing disclosures to investors.
  • A robust framework surrounding the reuse of collateral in relation to securities financing transactions is needed to prevent financial stability risks. Elements should include greater transparency for securities financing transactions via reporting to trade repositories and investors, harmonised rules on collateral reinvestment, and consistent imple- mentation of international policy frameworks.

The term “Shadow Banking” is prone to abuse and too frequently used indirectly to protect the past instead of advocating for the future. Internet finance will replace much of the traditional banking functions, driven by efficiencies of processes, costs and benefits. But all participants must be cognitive of potential systemic risks for any global financial transition.

The CFA Report is embedded below: