US regulators flag risks at non-bank financial firms

US watchdog worried about potentially risky practices at firms not subject to banks' rules

PUBLISHED : Thursday, 08 May, 2014, 1:10pm
UPDATED : Friday, 09 May, 2014, 1:00am

The US financial risk watchdog has raised red flags about new, potentially risky practices by asset managers and non-bank mortgage servicers, which it said were not regulated as carefully as banks.

The Financial Stability Oversight Council highlighted those sectors in a report published on Wednesday.

The group watches out for market risks and imposes additional regulation on big "systemic" firms, the collapse of which could harm the financial system.

Regulators said they are concerned some traditional bank activities are moving to non-bank firms that are not subject to capital and liquidity requirements.

At issue are indemnifications that asset managers offer some clients involved in securities lending activities to guard against the risk of borrower defaults.

Although asset managers receive collateral in exchange for the securities they lend, the report raises concerns that indemnifications could leave asset managers at risk because they are not required to set aside capital.

The report does not name firms, but BlackRock, for example, disclosed in November that it had indemnified US$115 billion worth of securities-lending loan balances for clients and that it held US$121 billion in cash and securities as collateral against it.

The report also raises concerns about a shift in mortgage servicing activity to non-bank firms. Mortgage servicers handle borrowers' accounts, processing payments and handling foreclosure proceedings.

The report says non-bank servicers do not have the same capital, liquidity or risk oversight as banks. As a result, it said the failure of a non-bank servicer could hurt investors in mortgage-backed securities.