Firms such as Blackstone Group LP, Apollo Global Management LLC and Fortress Investment Group LLC are often slapped with the vaguely sinister label, shadow bank, because they provide financing but aren’t regulated like traditional lenders.
President Donald Trump’s Treasury Department now says that’s downright unfair and wants global regulators to stop using the term when describing investment giants.
“The word ‘shadow’ could be interpreted as implying insufficient regulatory oversight, or disclosure,” Treasury said in a 163-page report released Thursday, which advocates an easing of restrictions on asset managers and insurers. Use of the term is “particularly inappropriate” for investment companies that are overseen by the Securities and Exchange Commission and file routine reports to the agency, Treasury added.
The Financial Stability Board -- a panel of international regulators -- admits in regular footnotes to its reports that it doesn’t mean the term as a pejorative. But the Treasury points out that the FSB doesn’t remind people of that when it issues press releases. So, the Treasury is offering an alternative -- and decidedly less nefarious -- term: market-based finance.
No Dodging
As it happens, that description has been used before. Blackstone’s billionaire President Tony James said in a 2015 Bloomberg Television interview that he didn’t like suggestions that his firm was dodging regulations in the shadows. He said: “Point of fact, shadow banking really is just market-based finance.”
There’s no universal definition for shadow banking. It’s generally used to describe institutions that borrow money and invest in financial assets, but get less government oversight than banks. This can include insurance companies, hedge funds, private equity firms, and government-sponsored entities such as Fannie Mae and Freddie Mac. It has been booming since the 2008 financial crisis, partly because regulators have saddled traditional banks with capital constraints.
The term was a favorite of presidential candidate Hillary Clinton, who routinely flagged shadow banking on the campaign trail as the real financial boogeyman that the feds needed to clamp down on, not megabanks.
If the Treasury gets its way, the FSB will have some issues to work out. Case in point: What to call future versions of its “Global Shadow Banking Monitoring Report.”
Easing Rules
Thursday’s Treasury report further reinforced the Trump administration’s campaign to roll back financial regulations, this time on insurers and asset managers that need “more efficient and effective regulation.”
It advocated eliminating stress-test demands for investment advisers, a general halt to designating individual insurers and asset managers as systemically important, easing the approval of new exchange-traded funds and reducing the burden of the finance industry-hated Volcker Rule.
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