Brussels, 04/09/2013 (Agence Europe) - On Wednesday 4 September, the European Commission laid the foundations of regulation of shadow banking, presenting a draft regulation on stricter rules for money market funds (MMFs) and a broader communication which highlights coming action.
Internal Market Commissioner Michel Barnier said: “We have regulated banks and markets comprehensively. We now need to address the risks posed by the shadow banking system. It plays an important role in financing the real economy and we need to ensure that it is transparent and that the benefits achieved by strengthening certain financial entities and markets are not diminished by the risks moving to less highly regulated sectors”. Shadow banking has a turnover of €1 trillion per year in the EU.
Liquidity. The Commission says that money market funds are not always as solvent at they should be and it is planning to introduce liquidity requirements. MMFs would be required to have at least 10% of their portfolio in assets that mature within a day and another 20% that mature within a week. The Commission will also be laying down requirements for the diversification of portfolios, aiming at a maximum exposure per emitter of 5%.
Money market funds promising reimbursement at a stable price are particularly in the firing line. If the value of the assets falls, then they would have to turn to their sponsor for aid or inject liquidity to ensure the funds can keep their promises. As leaked earlier this week (see EUROPE 10912), the Commission is planning to require them to set up a liquidity buffer of 3% of total assets.
The Commission is ignoring the recommendation of the European Systemic Risk Council that MMFs be banned, preferring to regulate them instead. Barnier said that he wants to avoid haarsh measures and MMFs are liked by various investors. He said he didn't want to wage war on them, but rather to make them transparent and well-capitalised.
Transparency. The Commission wants money market funds to comply with a number of transparency requirements, vis-à-vis the competition authorities and investors alike. In commercial documents, for example, they must state that the money market fund is not a guaranteed investment and that investors run the risk of losing their capital.
MMFs would be required to report to the authorities at least every quarter, giving details of the results of stress tests and information about assets and liabilities in the fund's portfolio.
The Commission is about to enter negotiations with the Council of the EU and the European Parliament, and MEP Elisa Ferreira (S&D, Portugal), S&D spokeswoman on economic and monetary issues, welcomed the plans: “All sectors of the financial markets should be regulated. Shadow banking entities and activities played a major role in the credit explosion that caused the financial crisis”, she says in a press release. Following suit, Said El Khadraoui (S&D, Belgium) said: “The legislative proposal on money market funds is an important step forward: these funds are investment funds and not banks”.
Some member states, Luxembourg and Ireland, for example, where most of these funds are based in the EU, will need some convincing, but France and Germany want a total ban on MMFs in the European Union.
Commenting on shadow banking in general, the Commission, which has been holding broad consultations since the publication of its Green Paper, says it is also looking at operations involving real estate. Barnier explained that the Commission is planning to introduce rules on the risks associated with deals that lead to excess debt, like repos and the lending out of securities.
The Commission is looking at the definition of banking and has asked the European Banking Authority to look into the matter and see whether or not the different interpretations of the CRD directive (on bank capital requirements) cause a problem.
The Commission will examine the best way of regulating interaction of the bank system and shadow banking and will pay particular attention to supervisory systems. Commissioner Barnier did not seem concerned about any risk of over-regulation, pointing out that each item of legisation would need to strike a balance within itself, with legislation as a whole and with the transatlantic system. He said that the G20 in St Petersburg could be examining shadow banking and how to regulate it. (EL/transl.fl)