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Taking action on shadow banking: avoiding new sources of risk in the financial sector
So that the EU learns all the lessons from the crisis, it is implementing ambitious regulatory reforms in the financial sector in general and in the banking sector in particular. This will contribute to creating a stronger and sounder financial sector at the service of the real economy. As part of these reforms, it is now time to deal with the growing area of non-bank credit activity, or so-called "shadow banking", which has so far not been a prime focus of prudential regulation and supervision. To a certain extent, shadow banking performs important functions in the financial system. For example it creates additional sources of funding and offers investors alternatives to bank deposits. But it can also pose potential threats to long-term financial stability because unknown sources of risk accumulate in the financial sector and there are potential spill-over effects from the shadow banking sector to the regular banking sector.
In response to invitations by the G20 in Seoul in 2010 and in Cannes in 2011, the Financial Stability Board (FSB) is in the process of developing recommendations on the oversight and regulation of these entities and activities. With today's consultation in the form of a Green Paper, the Commission is participating actively in the ongoing FSB work.
Internal Market and Services Commissioner Michel Barnier said: "The European Union has shown global leadership in implementing ambitious reforms in the area of financial regulation, in particular for banks. What we do not want is for financial activities and entities to circumvent existing and foreseen rules, allowing new sources of risk to accumulate in the financial sector. That is why we need to better understand what shadow banking actually is and does, and what regulation and supervision may be appropriate, and at what level. We must shed light on all parts of the financial sector."
According to the Financial Stability Board, the shadow banking system is "the system of credit intermediation that involves entities and activities outside the regular banking system". Possible shadow banking entities and activities include:
Money Market Funds (MMFs) and other types of investment funds or products with deposit-like characteristics
Investment funds that provide credit or are leveraged, including Exchange Traded Funds (ETFs) and hedge funds
Finance companies and securities entities providing credit or credit guarantees or performing liquidity and/or maturity transformation without being regulated like a bank
Insurance and reinsurance undertakings which issue or guarantee credit products, and
Securitisation and securities lending and repurchase agreement (repo) transactions.
Yesterday's Green Paper sets out how existing and proposed EU measures already address shadow banking activities. For example, off-balance sheet vehicles, such as Special Purpose Vehicles, are regulated indirectly through banking regulation. Hedge fund managers are regulated directly through the Alternative Investment Fund Managers Directive, which addresses a number of shadow banking issues. Some Member States also have additional national rules for the oversight of financial entities and activities that are not regulated at EU level.
Although these measures go some way towards addressing shadow banking entities and activities, there is still further progress to be made given the continually evolving nature of shadow banking and our understanding of it. In coordination with the FSB, the standard-setting bodies and the relevant EU supervisory and regulatory authorities, the aim of the Commission's current work is to examine existing measures carefully and to propose an appropriate approach to ensure comprehensive supervision of the shadow banking system, coupled with an adequate regulatory framework.
In this context, there are five key areas relating to banking, asset management, securities lending and repurchase agreements, securitisation, and other shadow banking entities where the Commission is further investigating options and next steps.
Stakeholders are invited to respond to the consultation before 1 June 2012.
A conference on shadow banking will take place in Brussels on 27 April.
All this work will inform the Commission's position in the international arena and its decision on the appropriate follow-up to be given.
See also MEMO/12/191
Chantal Hughes (+32 2 296 44 50)
Carmel Dunne (+32 2 299 88 94)
Audrey Augier (+32 2 297 16 07)