EU steps up regulatory pressure on 'shadow banks'

“We have regulated banks and markets comprehensively. We now need to address the risks posed by the shadow banking system. It plays an important role in financing the real economy and we need to ensure that it is transparent and that the benefits achieved by strengthening certain financial entities and markets are not diminished by the risks moving to less highly regulated sectors," said Internal Market and Services Commissioner Michel Barnier.

"We are not pointing an accusing finger at the sector. We just want it to work smoothly. There should be transparency and there should be good supervision," Barnier told reporters. "Finance should be serving the economy and not itself alone."

"Shadow banking was at the heart of the crisis," said Frederic Hache, a former derivatives banker who works with public-interest group Finance Watch. "As bank regulation has since tightened, activity may shift into the shadow sector."

"Across vast areas of Europe the economy remains stuck in the mire, unemployment is rampant and the currency crisis still not fixed. Yet nothing announced today will contribute a jot to turning that dire picture around. You have to wonder where the Commission gets its sense of priority," said UK MEP Syed Kamall, the Conservative spokesman on economic and monetary affairs in the European Parliament.

“"Instead of seeking ever more areas to regulate, we should ensure that we are focused on tackling the root causes of the crisis - including the state’s implicit guarantee of the financial system’s biggest banks. The Commission is sweating over building a mousetrap when there's a tiger on the loose," Kemall concluded.

“The main thrust of the Commission’s Shadow Banking Communication is around identification, measurement and transparency of shadow banking flows. This is admirable, although it may be a while before the data gaps can truly be filled. Some quick(er) wins are possible, however. We are pleased that the Commission has hailed as ‘essential’ private initiatives on the labelling of asset-backed securities, such as the Prime Collateralised Securities (PCS) label. ACCA’s work with UEAPME and AFME has emphasised the value of such tools and we hope to see them refined further in the future,” said Emmanouil Schizas, the senior economic analyst at ACCA, the Association of Chartered Certified Accountants. 

Emmanouil Schizas nevertheless warned that “the Communication, sharing as it does the G20’s intention to ‘eliminate the dark corners’ of the financial system, fails to properly acknowledge the fact that it is financial regulation itself, more than any other influence, that determines the size and shape of shadow banking. Extending capital rules to this sector needs to be carefully thought out, or it could end up creating no more than a new set of arbitrage opportunities.”

“Part of this sector exists only in order to take advantage of different regulation for economically equivalent transactions. To really control shadow banking, we need better regulations,” Schizas concluded.

The Greens expressed disappointment at the proposals, claiming they will fail to tackle the problems of the sector.

"The Commission's proposals are a serious disappointment given the urgent need to finally regulate the shadow banking sector, which has escaped regulation and played a central role in the financial crisis,” said the Greens German finance spokesperson, MEP Sven Giegold.

“This falls far short of what would be necessary to prevent emergency firesales of funds, a practise that poured petrol on the fire of the financial crisis. Value losses in a crisis will clearly be significantly higher than 3%, meaning money market funds will continue to exacerbate future crises. Worse, the finance industry lobby has succeeded in ensuring these insufficient proposals will be delayed, with a 3 years transition period,” Giegold added.