Commission issues Green Paper on the regulation of “shadow banking”

As part of its ambitious regulatory reforms in the financial sector in general and in the banking sector in particular, with a view of creating a stronger and sounder financial sector at the service of the real economy, the Commission has decided to tackle what it considers a 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 could 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 the Green Paper, the Commission is participating actively in the ongoing FSB work.

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:

• Securitisation and securities lending and repurchase agreement (repo) transactions.

The 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. 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, the Commission considers that 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.

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.

Source: Midday Express – Commission Press release