Commission wants to improve regulation of shadow banksFinancial institutions, which undertake bank-like transactions, but operate outside the regular banking sector, represent a growing market in Europe. However, the activities of shadow banks, such as investment funds and finance companies entail enormous risks, which could spill over into the entire banking sector. Based on a Green Paper, the EU Commission now wants to start a public consultation in order to clarify, what shadow banks actually are and how their regulation and supervision could be improved.
The credit intermediation system outside the regular banking system takes up a considerable share in the entire financial sector. Estimates of the Council for Financial Stability for 2010 assume a volume of the global shadow banking system of about EUR 46 billion; this corresponds to 25 to 30 percent of the entire financial system and half of all bank assets. In Europe, the share of shadow bank assets has increased drastically over the last years.
From the point of view of the EU Commission, shadow banks fulfil important tasks in the financial system up to a certain degree. They were, for example, additional sources of funding and provide investors with alternatives to bank deposits. However, the Green Paper also points out the risks, which emanate from the activities of shadow banks. For example, insolvencies and risks taken by shadow banks could easily spill over into the banking system, as financial institutions ‘in the shadow’ are often closely linked with the regular banking sector.
"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”, describes Michel Barnier, EU Commissioner for Internal Market and Services, the intention of the Commission.
Green Paper on Shadow Banking starts public consultation
However, it has yet to be clarified in detail, which companies and activities do actually fall under the term of shadow banking. Based on the initiated public consultation, the Commission is also hoping for answers to this question and for suggestions with regard to the challenges for supervisory and regulatory authorities. According to the Green Paper, it might be necessary to find procedures in respect of exchanging information on the ascertainment of shadow banks and their supervision between all EU supervisory authorities, the Commission, the ECB and other central banks. What kind of proposals the Commission will make at the end of the consultation to regulate the transactions of shadow banks is still open. One option would be to adopt new legislative provisions especially for shadow banks.
Interested actors have the opportunity of taking part in the consultation until June 1.
Green Paper Shadow Banking