European Commission publishes Green Paper on shadow banking
The Commission today launched a Green Paper on shadow banking, with the aim of assessing whether further measures are needed to regulate ”credit activity that is similar to a bank’s, but is not regulated like a bank”.
Shadow banking
From the Commission’s press release describing what shadow banking is:
“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.
Today’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.”
Aim of the Green Paper
The Commission’s purpose in launching this consultation is to consider what measures may need to regulate and lessen risks posed by the shadow banking sector:
“Some of these risks can be systemic in nature, in particular due to the complexity of shadow banking entities and activities, their cross-jurisdictional reach and the inherent mobility of securities and fund markets, and the links between shadow banking entities and activities with the regular banking system. It is the Commission’s objective to ensure that those risks are dealt with appropriately, while maintaining the useful functions performed by shadow banks.”
The Green Paper can be read here. The Commission’s useful and full FAQs on the Green Paper, its background, purpose and international context are here.
UPDATE 24 July 2012: ESMA has published its response to the Green Paper.
See also: Lord Turner on shadow banking and the risks it poses to financial stability
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