At a recent conference speech in Helsinki, Adrian suggested that erasing grey areas in shadow banking could be to give issuers new outlets for capital raising and lenders more avenues for portfolio diversification.
Among his five points of concern were the involvement of too many entities.
Adrian said: “Transformations are often performed along a chain of specialised and interconnected intermediaries and can thereby involve the balance sheets of many entities.”
Another concern was the the reuse of collateral and how one common drawback is that frequently reused collateral can give rise to heightened interconnectedness.
Adrian also discussed how a presumption of sponsor support is a risk of shadow banking that can cause contingent liabilities for the sponsor, often resulting in reputational damage if investor return expectations are not met.
Other shadow banking deals that “can have margins that are so low they cannot absorb the full cost a backstop by themselves”, were also highlighted as problem areas.
Adrian stressed that the IMF, along with the FSB and other regulatory bodies had no desire to shut down the alternative financing industry but that some aspects of the market’s risk features must be managed.
In conclusion, Adrian, said that the main obligation of the IMF is to “try to understand if there are motivations for creating these particular features that need to be taken into account by policy makers and market participants”.