There may be direct regulation of shadow banking to tackle risks shifting there from a more heavily supervised mainstream banking sector, a global watchdog chief said Tuesday.
Mark Carney, appointed last week by world leaders to head their regulatory task force, the Financial Stability Board, said regulating the shadow banking industry will be one of the board's top priorities in coming months.
Carney, also Bank of Canada governor, said higher capital and liquidity standards for mainstream banks will create incentives to push activities to the shadow sector.
The FSB lists money market funds, special investment vehicles, securitisation and securities lending in the $60 trillion sector.
Jurisdictions like the United States and the European Union are already approving rules to crack down on areas like securitisation and money market funds but the FSB wants a common global approach to avoid regulatory gaming.
Carney signalled the FSB is likely to adopt a two-pronged approach with hard rules for some activities and more transparency in others.
It starts actually through the interface between the regulated and the shadow banking sectors because in the end much of the liquidity for shadow banking is provided and maturity transformation is facilitated by the regulated sector, Carney told a news conference during a visit to London.
There is a possibility, and we've looked at it seriously, in terms of direct regulation of systemic parts of the shadow banking sector, alterations to standards in key elements of the shadow banking sector, securitisation is an obvious example, money market funds, Carney said.
With other parts of the shadow banking sector the emphasis would be on registration requirements to improve transparency as opposed to actual regulation but this could change, he added.
The FSB said in a draft paper last month there could be possible limits on the size and nature of a bank's exposure to shadow banking entities.
Its final recommendations for G20 leaders on regulating shadow banks are due in 2012.
The G20 last week agreed to beef up the FSB's resources to ensure that tougher bank capital standards already agreed are actually implemented consistently across member countries.
Carney indicated that the FSB is unlikely to suggest actions following the collapse of U.S. futures brokerage MF Global which has unveiled $633 million of client money missing.
It's a basic principle which is to have segregation of client funds ... and it's the basic responsibility of regulators towards those entities to make sure that is indeed the case, Carney said.
But it was not a priority for the FSB's agenda to spot check or audit individual firms and regulators, Carney said.
(Reporting by Huw Jones; Editing by Jon Loades-Carter)