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BackSimilar to banks, they arrange credits, but without being subject to the same regulations: How the regulation of “shadow banks“, such as finance companies or money market funds can be improved in the future to counteract their risks to the stability of the financial system, is currently being hotly debated at EU level. Following the Green Paper on Shadow Banking published by the EU Commission and in the context of the ongoing consultation, it was the aim of a conference to discuss different views on the role of shadow banks and possible relevant regulatory plans.
The Commissioner for Internal Market and Services, Michel Barnier, reminded that it was an objective of the ongoing consultation to define the actual meaning of shadow banking. It had to be ensured that regulatory and supervisory bodies were able to recognise and control the leverage effects of the shadow bank actors. Alternative financial chains, which benefit the real economy, should not be called into question. Money market funds, for example, could provide extensive short-term financing; however, they were also open to massive withdrawals of funds.
Jean-Pierre Jouyet, Head of the French financial market authority Autorité des marchés financiers, said at the start of the first panel discussion, shadow banks would be a source of systemic risks. However, if they were regulated properly, they would also represent an important source of finance for the economy. As a first step, shadow bank entities should be identified by their activities. This review had to be carried out on a permanent basis, as the financial system was subject to constant changes. The second step would be to analyse and combat risks, which a shadow bank entity would represent to the financial system. There would be various options for regulatory approaches.
Sven Giegold, MEP of the Greens, pointed out that complicated financial products had produced dangerous bubbles during the financial crisis, and that the risk had been passed on to people who were not able to carry the burden. Politics was driven by a certain ideology and interests; the financial markets had adopted the stance that anything was possible, which had not been regulated. However, from an economic point of view, there was no indication that more complex and unregulated financial systems would lead to growth. Giegold urged for less complexity in the financial system and for more coherence concerning the regulation.
Paul Tucker, Deputy Governor of the Bank of England, underlined that the aim was not to remove the shadow banking system, but to monitor it effectively and to react to its risks in a flexible manner. Shadow banking was not to be put on the same level as the entire non-banking financial sector, and the vast majority of hedge funds were not shadow banks, agreed Tucker and Jouyet. In the context of a list of detailed proposals, Tucker, amongst other things, voiced the opinion that shadow bank vehicles or funds, which were sponsored or operated by banks, should be integrated in their balance sheets. If finance companies and securities dealers are financed to a large extent by short-term debt, they should be subject to the regulation and supervision of their balances sheets, as it is typical for banks. Apart from that, only banks should be permitted to use client moneys to finance their own business activities to a material extent.
Xavier Freixas, Professor at the Universitat Pompeu Fabra in Barcelona, argued that finance companies would have a lower risk of failure as they had a lower level of external debt financing of capital than banks. Their activities would be a welcome alternative to finance the industry, and finance companies could step in if banks were unable to provide sufficient loans. The point was to minimise costs incurred by bankruptcies. It was within this sense that banks should be protected and forms of financing with low risk of bankruptcy should be promoted.
Proposals on shadow banking can be submitted to the Commission within the scope of the consultation until 1 June.
Further information:
Green Paper on Shadow Banking
Jean-Pierre Jouyet, Head of the French financial market authority Autorité des marchés financiers, said at the start of the first panel discussion, shadow banks would be a source of systemic risks. However, if they were regulated properly, they would also represent an important source of finance for the economy. As a first step, shadow bank entities should be identified by their activities. This review had to be carried out on a permanent basis, as the financial system was subject to constant changes. The second step would be to analyse and combat risks, which a shadow bank entity would represent to the financial system. There would be various options for regulatory approaches.
Sven Giegold, MEP of the Greens, pointed out that complicated financial products had produced dangerous bubbles during the financial crisis, and that the risk had been passed on to people who were not able to carry the burden. Politics was driven by a certain ideology and interests; the financial markets had adopted the stance that anything was possible, which had not been regulated. However, from an economic point of view, there was no indication that more complex and unregulated financial systems would lead to growth. Giegold urged for less complexity in the financial system and for more coherence concerning the regulation.
Paul Tucker, Deputy Governor of the Bank of England, underlined that the aim was not to remove the shadow banking system, but to monitor it effectively and to react to its risks in a flexible manner. Shadow banking was not to be put on the same level as the entire non-banking financial sector, and the vast majority of hedge funds were not shadow banks, agreed Tucker and Jouyet. In the context of a list of detailed proposals, Tucker, amongst other things, voiced the opinion that shadow bank vehicles or funds, which were sponsored or operated by banks, should be integrated in their balance sheets. If finance companies and securities dealers are financed to a large extent by short-term debt, they should be subject to the regulation and supervision of their balances sheets, as it is typical for banks. Apart from that, only banks should be permitted to use client moneys to finance their own business activities to a material extent.
Xavier Freixas, Professor at the Universitat Pompeu Fabra in Barcelona, argued that finance companies would have a lower risk of failure as they had a lower level of external debt financing of capital than banks. Their activities would be a welcome alternative to finance the industry, and finance companies could step in if banks were unable to provide sufficient loans. The point was to minimise costs incurred by bankruptcies. It was within this sense that banks should be protected and forms of financing with low risk of bankruptcy should be promoted.
Proposals on shadow banking can be submitted to the Commission within the scope of the consultation until 1 June.
Further information:
Green Paper on Shadow Banking