EU seeks to shine a light on risky shadow banking
News Date: 4th September 2013
The European Union turned up the heat Wednesday on loosely-regulated hedge funds and other segments of the so-called shadow banking system, as it launched a bid to contain their risky financial activities.
Some of these entities, which offer services similar to banks but operate outside the regular banking system, helped fuel the financial crisis that engulfed the world in 2008.
"We need to address the risks posed by the shadow banking system," EU Market Regulation Commissioner Michel Barnier said, arguing that new rules for the industry would avoid risky business "moving to less highly regulated sectors."
His recommendations come just as Group of 20 leaders prepare to discuss shadow banking at a summit in St Petersburg that gets underway on Thursday.
The size of the shadow banking system across the world was estimated at about 51 trillion euros (67 trillion dollars) in 2011, representing 25 to 30 per cent of the overall financial system.
The sector is "of systemic importance for Europe's financial system," but lacks transparency and "constitutes a major source of contagion risk," said the European Commission.
The EU's executive believes that regulating shadow banking would help "avoid situations where states, governments and citizens are responsible for repairing damage to the financial system."
But the industry has expressed concern that the commission will stifle its business with overreaching reforms, and has taken issue with the very use of the term "shadow banking".
"(It) seems to imply that the targeted entities and activities are somehow less legitimate or less transparent than banking activities," the European Fund and Asset Management Association (EFAMA) has complained in contributions to the EU debate.
"It ... does not properly reflect the important role played by those activities in funding the real economy as well as contributing to the liquidity and stability of financial markets," it added.
Proposals such as capital requirements for money market funds would "destabilize the business model," EFAMA has argued, warning also that they "would confuse the investment community."
Money market funds were nevertheless the first activity that the commission took aim at on Wednesday, proposing that they should have to diversify their portfolios, set up mechanisms to pay back investors at short notice, and establish a "capital buffer."
The proposals have to be endorsed by EU governments and the European Parliament to become law.