New rules imposed around the world since the 2008 financial crisis have helped strengthen the global financial system but the work is far from complete.
Monetary Authority of Singapore (MAS) managing director Ravi Menon gave this assessment at the Pan-Asian Regulatory Summit on Wednesday while urging his international counterparts not to succumb to "reform fatigue".
But reformers still need to be mindful of the impact of regulations on the wider economy, he said, noting that the higher capital liquidity requirements banks have to adhere to may create an incentive for shadow banking.
The Financial Stability Board, an international body that monitors the global finance system, estimates that shadow banking constitutes about a quarter of the total financial system.
With bank regulations still tightening, analysts expect the shadow banking sector to continue to grow, Mr Menon said.
But the shadow banking system can provide a useful alternative source of funding, he added.
"What we do need to watch out for is the accumulation of risks in the shadow banking sector and the potential spillover of these risks to the regulated banking sector."
Mr Menon also noted that the various regulatory reforms taken together may lead to a pull-back in trade finance and long-term investment financing.
While preliminary data suggests that the availability and cost of trade finance have not been greatly affected by the implementation of tighter banking rules, there is a bigger challenge in long-term financing, especially for infrastructure.
"It may be the case that the post-crisis financial system may not be adequately structured to provide certain types of long-term financing," he said.
This is because longer-term corporate and project finance loans already attract a higher capital charge compared with short-term loans. And to meet liquidity requirements, banks may substitute long-term lending with short-term lending.
"But the fundamental solution does not lie in diluting regulatory requirements," Mr Menon noted.
"Policymakers should also focus on ways to develop sustainable alternative sources of long-term finance."
Finally, he pointed out that regulators have to pay closer attention to the cross-border implications of new rules.
He cited a European regulation requiring financial market infrastructure to be subject to European rules or rules deemed equivalent before they can provide services to European Union players.
"These rules are well intended and seek to address genuine regulatory concerns in these jurisdictions," he noted.
"But extending national rules across borders often gives rise to overlapping regulations, which can create additional compliance costs for internationally active financial institutions."
If imposing national regulations across borders is unavoidable, robust mutual recognition frameworks must be put in place, he said.
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