Panelists at this week’s American Securitization Forum annual meeting fear that reform efforts around shadow banking will significantly curtail credit from non-bank intermediaries.
Debbie Toenines, managing director at JPMorgan Chase, said that the term shadow banking “sounds too negative.” She hopes that as regulators make rules to govern these companies, they “give credit to regulation that has already taken place.”
Panelists explained that the term shadow banking covers the gamut of the non-Fed credit system, including finance companies, bond funds, thrifts, etc.
The concern is that outside of the Fed, these firms should have “access to liquidity so they can meet their obligations and will not lead to a systemic failure,” said Stewart Cutler, a managing director at Barclays.
The interest in shadow banking intensified after the Federal Reserve Bank of New York released a staff report on shadow banking regulation in early April. In the paper, the bank reviewed the effect of regulatory efforts on shadow funding sources such as ABCP, triparty repurchase agreements, money market mutual funds and securitization.
An item discussed at the panel was the Securities and Exchange Commission (SEC) calling for additional structural reforms to money market funds. One of the SEC-proposed changes was requiring these funds to “float” their net asset value (NAV) instead of maintaining the stable $1 NAV.
Panelists said that although this move can desensitize investors to daily fluctuations in the value, this might not be needed because usually a money market fund portfolio “doesn’t move.”
Additionally, shifting from a stable to a floating NAV would introduce accounting and tax obligations that would prompt investors to decrease their exposure to the industry, according to Jane Heinrichs, senior associate counsel at Investment Company Institute.
These buyers include ABCP conduits, which comprise over 30% of the money market mutual fund investor base.
Adam Ashcraft, senior vice president and head of structured product at the New York Fed recalled that in 2008, the government stepped in to help resolve a crisis in the money market mutual fund industry.
After investors pulled billions out of a class of these funds in 2008, both the Fed and the U.S. Treasury created programs to address the dislocations in the market. Ashcraft said that the government does not want this to happen again.