By Huw Jones
February 22, 2012 4:35 PM EST
(Reuters) -- Policymakers from the world's top economies meet this weekend in Mexico City to begin finding common ground to tackle the world's economic challenges, which include reining in a $60 trillion financial sector on the fringe of mainstream banking.
Leaders of the Group of 20 asked their task force, the Financial Stability Board, to come up with plans to regulate "shadow banks" like hedge funds, money market funds, repurchase agreements and securities lending.
"It will be a major point at issue this year. However, we are not at a stage where the FSB will reach some kind of decision to be reflected (in the) G20 debate," a diplomat attending the Feb. 25-26 meeting of G20 finance ministers and central bankers said.
Regulators are still looking into the sector, but say action is inevitable to stop riskier activities from migrating as mainstream lenders become more tightly supervised.
The FSB set up working groups last year to study measures such as limits on exposure to shadow banks and forcing lenders to hold more capital to cover that exposure.
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Many of the groups report in July, too late for the June G20 leaders' summit, but they will be given details by then on the "design" of regulation for shadow banks, a second G20 source said.
The financial sector is watching closely as to how regulators will intervene in an area which was only identified as a sector in 2007.
Some concerns are already being addressed, such as tighter scrutiny of hedge funds, stricter rules on securitization and U.S. plans to crack down on money market funds.
"It's a question of how you control and contain risks. How do you address the weakness and keep the benefits?" a banking official said on condition of anonymity.
G20 actions would need to cover markets in countries as diverse as China, India and Brazil and not be solely focused on the European Union and United States, the official said.
A "big bang" approach is not expected as G20 regulators feel their way, using data collection and monitoring.
"They could move forward with some actions first as clearly some pieces of work are going to be finished before others," a third G20 source said on condition of anonymity.
The G20 could go ahead with initial steps if regulators felt they are "comfortable, have covered the terrain and understood the phenomenon well enough."
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