Shadow Banking Key Issues
The European Commission published a green paper on shadow banking on 19 March 2012. The paper gives an overview of current shadow banking initiatives and analyses the outstanding issues, with the aim of proposing an appropriate regulatory framework and system of supervision.
The European Parliament adopted a non-legislative report on shadow banking in plenary on 20 November 2012. The report suggests different ways to identify systemic risk by creating a central EU database on repo transactions, setting up a central registry for risk transfers and introducing measures to consolidate off-balance sheet entities, such as SIVs and conduits, for accounting purposes.
Shadow banking is the system of credit intermediation that involves entities and activities outside the regular banking system and its regulation, according to the Financial Stability Board (FSB). Shadow banking entities include Special Purpose Vehicles (SPVs), conduits and Special Investment Vehicles (SIVs) which are often funded by banks, Money Market Funds (MMFs), Exchange Traded Funds (ETFs) and some hedge funds, among others.
The debate on how to regulate shadow banking was initiated by G20 leaders in Seoul in 2010 and followed up with the conclusions of the Cannes summit in 2011. Leaders assigned responsibility for overseeing the tasks to the FSB, which initiated five regulatory workflows to develop policy recommendations. The FSB’s five workflows, most of which reported in the last quarter of 2012, are:
- interaction between banks and shadow banking entities (BCBS)
- mitigation of systemic risks of Money Market Funds (IOSCO)
- assessment of existing securitisation requirements (IOSCO with BCBS)
- other shadow banking entities (FSB)
- securities lending and repos (FSB)