Brussels, 16/02/2012 (Agence Europe) - Internal Market Commissioner Michel Barnier is to initiate a debate in March lasting until June on ways to identify and minimise the “major risks” that the shadow banking sector can cause for financial stability. The European Commission thus hopes to contribute to work conducted within the G20 framework aimed at 25-30% of the whole financial system. According to the International Monetary Fund (IMF) Financial Stability Board, credit activities outside the regular banking system amounted to €46,000 billion in 2010, over twice that in 2002.
Not all shadow banking is potentially harmful, the Commission states in its consultation paper, a copy of which was obtained by EUROPE. Entities concerned constitute alternatives to non-guaranteed bank deposits, provide alternative financing for the real economy and potentially contribute to risk diversification. Nonetheless, shadow banking does entail risk of a systemic kind. As they do not come under any regulation, the structures activated through customer deposits fall within the short-term logic and are therefore exposed to “sudden and massive” withdrawal risks. Some entities make abusive use of indebtedness with a leverage effect without being subject to the limits imposed by legislation. The Commission notes: “A chain of shadow banking entities can be used to avoid regulation or supervision applied to regular banks by breaking the traditional credit intermediation process in legally independent structures dealing with each other.”
The Commission has drawn up a non exhaustive list of the financial entities and activities concerned and stakeholders are invited to complete that list. For example, there are: - securitisation vehicles such as ABCP (Asset Backed Commercial Paper) conduits, Special Investment Vehicles (SIV) and other Special Purpose Vehicles (SPV); - Money Market Funds (MMF); - credit or leveraged investment funds including Exchange Traded Funded (ETT); - finance companies providing credit or credit guarantees without being regulated like a bank; - securities entities falling outside banking regulation which perform maturity transformation and/or undergo credit risks; - securities lending and repurchase transactions (“repo”); - and insurance and reinsurance undertakings which issue or guarantee credit products.
What regulatory action? European legislation, especially on banking and insurance, already contains provisions in order to ensure that exposure by regulated establishments to the risks of shadow banking is limited. According to the Commission, regulatory action could nonetheless prove useful, primarily to better monitor the sector's activity. Permanent structures could be set in place for collecting and exchanging information, with new powers being given to national supervisors. Also, in line with the approach followed for investment funds, it might be possible to extend the scope of existing regulations to new entities in order to have broader coverage and to facilitate supervisory arbitrage. The Commission is studying how timely it is to extend a number of provisions of the proposed CRD IV directive to a number of entities that do not come under the definition of banking establishments. For MMF and ETT, the regulatory debate covers liquidity-related problems, the quality of collateral provided as a guarantee, and possible conflict of interest between stakeholders. For “repo”, discussion focuses on the management of collateral, the way transparency should be increased for such activities, and the role of market infrastructure. Regarding securitisation, the Commission points out that it has initiated work with its US counterparts from the SEC (Securities and Exchange Commission) in order to compare rules in force in the EU with those in force in the USA. (MB/transl.jl)