Shadow Banking: The shifting of attention towards asset management funds and its potential impact on the private equity sector

Shadow Banking: The shifting of attention towards asset management funds and its potential impact on the private equity sector

Abstract:

Over the course of the last decade the authorities for the supervision and control of the stability of the financial markets have centred their attention on the monitoring and supervision of the parallel banking sector or Shadow banking, that has been linked to the origin or the amplifying effects or the last financial crisis, but which equally has been recognised as providing an element of competition and a source of alternative channels of finance to the market.
The Financial Stability Board has defined shadow banking as "credit intermediation involving entities and activities outside the regular banking system". This broad definition attempts to cover all financial intermediation not carried out by banks, so as to analyse the risks it may present from the perspective of financial stability, and in particular its interconnections with the regulated financial system. However, it is clear that not everything covered by this blanket definition poses risks, and so within the ample concept of non- bank financial intermediation, a more precise delimitation of "dangerous" activities has been necessary, in order to provide an adequate regulatory response to them.
Recent experience has shown that the composition of Shadow banking is constantly shifting, whether as a response to the evolution of the economic environment, or as a consequence of the regulation to which it has been subjected, resulting in the search for areas of lighter regulation so as to achieve “regulatory arbitrage”. This has meant that the delimitation of Shadow banking by the authorities has to be constantly revised and adapted. At the moment, the focus of attention is on the management of financial assets by funds in general. For that reason, the venture capital and private equity sector may see itself affected by the new regulatory initiatives adopted in this field.
This article analyses the characterisation of Shadow Banking and its evolution, as well as the work carried out in monitoring and designing the treatment it receives by the supervisory authorities of the financial markets and the authorities charged with ensuring financial stability.

Keywords: Shadow banking, Non-Bank Financial Intermediation, Assets under management, Invest funds, Private equity.