On 29 January 2014, the European Commission adopted a proposal for a regulation to stop the biggest banks from engaging in proprietary trading and to give supervisors the power to require those banks to separate other risky trading activities from their deposit-taking business.
To prevent banks from attempting to circumvent these rules by shifting parts of their activities to the less-regulated shadow banking sector, the Commission adopted a proposal for a regulation aimed at increasing transparency of certain transactions outside the regulated banking sector.
This proposal provides a set of measures aiming to enhance regulators’ and investors’ understanding of securities financing transactions (STFs). These transactions have been a source of contagion, leverage and procyclicality during the financial crisis and they have been identified in the Commission’s Communication on Shadow Banking as needing better monitoring.
Since the financial crisis began in 2007/2008, the European Commission has undertaken the biggest reform of financial services ever seen in Europe. The aim is to restore sustainable health and stability to this sector by addressing the shortcomings and weaknesses highlighted by the crisis.
The Commission’s approach regarding the shadow banking sector consists of delivering transparent and resilient market-based financing while tackling major financial risks. It should ensure that the benefits achieved by strengthening the resilience of certain actors and markets are not diminished by financial risks moving to less regulated sectors. Such regulatory arbitrage would greatly undermine the impact of the reforms.
Following consultation on the Green Paper in March 2012, the Commission adopted on 4 September 2013 a Communication setting out its roadmap to limit the emergence of risks in the unregulated or less regulated financial system, in particular risks of systemic nature. These could arise for instance through the shadow banking sector’s interconnectedness with the banking system through contagion risk.
On the same day, the Commission also proposed new rules on money market funds. This is one of the actions recommended by the Communication on shadow banking.
Green paper on Shadow Banking – 19.03.2012
An increasing area of non-bank credit activity, or shadow banking, has not been the prime focus of prudential regulation and supervision. 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 can also pose potential threats to long-term financial stability. The purpose of this Green Paper is to take stock of current development, and to present on-going reflections on the subject to allow for a wide-ranging consultation of stakeholders.
Conference: Towards a better regulation of the shadow banking system – 27.04.2012
Shadow banking, or the system of credit intermediation that takes place outside the regular banking system, has been gaining increasing attention since the G20 Seoul Summit in 2010. The European Commission will soon present a consultative Communication on shadow banking and intends to use this event as a unique opportunity to gather all interested stakeholders. It will assist the Commission in collecting additional evidence to inform future and improved regulation of shadow banking.