Brussels, 19/03/2012 (Agence Europe) - The European Commission is running a public consultation exercise until Friday 1 June 2012 on the risks to financial stability from shadow banking, which accounts for between 25% and 30% of the global financial industry (€46 trillion in 2010 according to the IMF's Financial Stability Board - see EUROPE 10555). The idea is to get a better understanding of the rise in shadow banking in Europe in order to design appropriate legislation. A special conference will be held in Brussels on Friday 27 April with this in mind.
EU Internal Market Commissioner Michel Barnier said that he was not casting stones and was not out to destroy shadow banking, but wanted to cast a spotlight on the practice in order to regulate it. He said shadow banking could have a positive impact by allowing a useful diversification of sources of finance at a time when banks need to shore up their balance sheets. Banking is very creative, he said, and there is always the danger that innovative new products will shift risk into unregulated areas, which can generate new economic crises. The Commissioner wants Europe to lead the world when it comes to regulating shadow banking, but does not necessarily want Europe to go it alone.
The Commission is starting off by studying the phenomenon in detail. It has published a list of possible shadow banking entities to be discussed in the consultation exercise, namely special purpose entities which perform liquidity and/or maturity transformation; for example, securitisation vehicles such as ABCP conduits, Special Investment Vehicles (SIV) and other Special Purpose Vehicles (SPV); money market funds (MMFs) and other types of investment funds or products with deposit-like characteristics, which make them vulnerable to massive redemptions (“runs”); investment funds, including exchange traded funds (ETFs), that provide credit or are leveraged; finance companies and securities entities providing credit or credit guarantees, or performing liquidity and/or maturity transformation without being regulated like a bank; and insurance and reinsurance undertakings which issue or guarantee credit products.
Once it has a clear picture, the Commission wants to see whether EU and national supervisors are capable of detecting all the dangers and deal with them appropriately. The commissioner pointed out that some rules already exist, like EU regulations whereby banks have to have higher own-capital for securitisation (the Basel III Directive) and rules governing hedge funds.
Welcoming the Commission's move, the chair of the EP's economic and monetary affairs committee, British Liberal Sharon Bowles, issued a press release stating: “I welcome the moves toward greater understanding and oversight of shadow banking, and in particular urge that some interactions with the banking sector and other financial institutions be tackled in ongoing legislation. Formalised reporting of repos and securities lending by banks could also be introduced both for transparency and information-gathering purposes. Parliament amendments to CRD IV have already been tabled to this effect.” (MB/transl.fl)