What lessons can finance leaders take from the shadow bank solution?
In the early 2000s, many banks were deemed "too big to fail" — but self-destructed in the wake of global financial instability. Left behind were the more resilient artifices of shadow banking, what The Economist describes as any "financial intermediaries that perform bank-like activity but are not regulated as one."
These hedge funds, bond trading platforms, mobile payment systems and peer-to-peer websites enjoyed both speedy success and virtually no oversight, making it difficult for traditional banks and struggling corporations to right the economic ship. Finance leaders face a parallel challenge: the evolution of shadowy payroll and finance practices when their organization undergoes significant change. The rise and regulation of shadow banks offer actionable insight to help mitigate internal finance issues.
Taming the Shadow Bank
According to the Financial Stability Board (FSB), several regulatory reforms and tools have been developed to help combat shadow banks, including:
- System-Wide Oversight and Monitoring. This both assesses ongoing stability risk and empowers annual monitoring exercises to identify emerging issues.
- New Rules. Both consolidation rules for off-balance sheet entities and enhanced bank prudential rules help regulate banks' involvement with shadow firms.
- Mismatch Correction. One key driver of the 2008 financial crisis was liquidity/maturity mismatches. By reducing the likelihood of these mismatches and introducing reforms of money market funds, shadow banks are less likely to cause stability risks.
- Increased Transparency . Both national and regional reforms have addressed issues of shadow banking transparency and incentivisation.
There's more work to come. FSB members have agreed that system-wide oversight and monitoring must be strengthened, while international policy requires greater development to address remaining shadow bank concerns. Nonetheless, the FSB now says that "the aspects of shadow banking considered to have contributed to the global financial crisis have declined significantly and generally no longer pose financial stability risks."
Step 1: Regulate
So what's the takeaway for finance leaders? That in times of significant financial change — a global expansion, significant movement of capital or restructuring of organizational boundaries — there's an increased risk of "shadow" activities that don't fall within established guidelines but aren't specifically prohibited by corporate policy. Consider the problem of cyberfraud. As noted by HR Dive, 70 percent of staff don't know enough about preventing cyberfraud and cyberattacks; they may open infected email attachments or download malicious files.
When businesses are undergoing significant financial shifts, HR and IT staff may not have the bandwidth to address or remediate these issues. Other financial frustrations include staff taking on more overtime than allowed by law or forgetting to clock in and out using time cards, which can cause headaches for HR down the line.
Just like the FSB, finance leaders need to develop solutions that address both local-level and enterprise-wide issues. For example, local solutions might include a clear, step-by-step overtime approval process, while global initiatives could target widespread cybersecurity training for employees. No matter the substance of new policies and procedures, however, consistency is key. As noted by FSB chairman Carney, "reform fatigue" on the part of legislators or rules that are not completed "urgently and then implemented faithfully" could undermine progress made.
Step 2: Don't Eliminate
It's important for finance leaders to recognize the value in some shadow processes. That's the argument of the International Monetary Fund, which confirmed that it will not ban shadow banking because it "can serve useful economic functions," reports the Securities Lending Times.
At the organizational level this might be the over-zealous employee that works too much overtime or the brand advocates accidentally oversharing on social media. Properly managed and monitored, they offer benefit to the organization. Attempting to eliminate shadow processes altogether, meanwhile, simply causes them to burrow deeper underground.
Regulation has reduced the risk of shadow banking and enhanced its utility. With the right combination of local monitoring, enterprise-wide policy making and process adaptability, finance leaders can take charge of their own shadow infrastructure.