Legislative package on shadow banking

In its 2012 own initiative report the European Parliament endorsed the following definition of shadow banking: “a system of intermediaries, instruments, entities or financial contracts generating a combination of bank-like functions but outside the regulatory perimeter or under a regulatory regime which is either light or addresses issues other than systemic risks, and without guaranteed access to central bank liquidity facility or public sector credit guarantees”. This description encompasses financial activities and entities such as hedge funds, money market funds (MMFs), broker dealers, securities lenders and investment funds.

The significant risks that shadow banking activities pose to the global financial system and the economy as a whole came to light abruptly with the 2008 financial crisis. Governments and regulators were forced to intervene swiftly to make sure that shadow banking activities do not jeopardize in the long run the stability of the global economy. Since 2009 the European Union has implemented far-reaching reform measures designed to regulate financial activities and entities such as CRD II, CRD III and AIFMD. Although some of these measures also apply to shadow banking a specific legislative package to regulate these activities was only finalised in 2013.

After an initial public consultation in March 2012, the European Commission proposed in September 2013 a twofold legislative package to regulate shadow banking activities. The first part of the package is the Regulation for Money Market Funds (MMFs) (2013/0306 (COD) that establishes liquidity requirements, imposes a 3% capital buffer on net asset value and requires more transparency and better information for investors. This procedure is still awaiting European Parliament ECON Committee’s vote.

The communication on shadow banking COM(2013)0614 is the second part of the package. It looks at all existing measures that address shadow banking risks and describes the additional measures that need to be implemented in the near future.

Overviews

What Is shadow banking? / Laura E. Kodres, IMF, June 2013, Vol. 50, No. 2
This two page document describes the main characteristics of shadow banking activities and briefly summarises the steps taken by governments to regulate them.

Shadow banking in the Euro Area: an overview / Klára Bakk-Simon et al., ECB Occasional paper no. 133, April 2012, 38 p.
After defining shadow banking, this document examines its main components and finishes with an evaluation of the size of these activities in the Euro area.

Analysis

Coming out of the shadows. A Cicero Group special report on the shadow banking package / Cicero Group, September 2013
This report provides a short overview of the whole legislative package and then, in table format, comments on individual articles and chapters of the proposal on MMFs.

Money market funds face tough new regulation: European Commission proposes a Regulation on money market funds / Ernst & Young, September 2013

EU steps up regulatory pressure on ‘shadow banks’ / EuroActiv, 09 September 2013
This document includes a short explanation of the positions and opinions of several MEPS and other stakeholders.

Out of the grey zone: EU to oversee shadow banks / Struenkelnberg, Thomas, DPA Insight EU, September 2013

Money market funds and shadow banking cash buffers, transparency and the long road ahead / Deloitte, September 2013
This analysis starts with a short description of the industry context. It continues with a detailed examination of the measures proposed in the MMFs regulation and in the Shadow banking communication and ends with an account of forthcoming events that might affect the approval of the legislative package.

Stakeholder views

European Parliament

Initial appraisal of a European Commission Impact Assessment – Money market funds / Ex-Ante Impact Assessment, EPRS, European Parliament, February 2014

European Central Bank (ECB)

Enhancing the monitoring of shadow banking / ECB, Monthly Bulletin, February 2013
This ECB analysis focuses on the importance of shadow banking activities in the Euro area; it pays particular attention to repo and securities lending markets.

International Monetary Fund (IMF)

What Is shadow banking? / Stijn Claessens; Lev Ratnovski; IMF Working Paper Research Department, February 2014
The authors of this report propose a new definition of shadow banking and analyse the consequences and policy implications involved.

Financial Stability Board – FSB

The FSB has developed a framework to closely monitor shadow banking activities. They also published detailed policy recommendations in August 2013.

German Investment Fund Association (BIV)

Position on Regulation of money market funds and Position on shadow banking

The International Money Market Funds Association (IMMFA)

The International Money Market Funds Association welcomed some of the measures included in the Commission’s proposal. However the IMMFA opposes the 3% capital buffer as it would ultimately harm investors.

Investment Company Institute (ICI)

ICI has published its position on the different MMFs reforms and in September 2013 announced its disappointment with the EU MMFs proposal.

Related legislative procedure(s)

Reporting and transparency of securities financing transactions / 2014/0017(COD)

Shadow banking / 2012/2115(INI)