European Commission consults on shadow banking | Practical Law

European Commission consults on shadow banking | Practical Law

The European Commission has published a green paper on shadow banking, consulting on its regulatory approach to shadow banking entities and activities. (free access)

European Commission consults on shadow banking

Practical Law UK Legal Update 8-518-5278 (Approx. 4 pages)

European Commission consults on shadow banking

by PLC Financial Services
Published on 19 Mar 2012 • European Union
The European Commission has published a green paper on shadow banking, consulting on its regulatory approach to shadow banking entities and activities. (free access)
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On 19 March 2012, the European Commission published a green paper consulting on the approach it should take towards the regulation of shadow banking entities and activities.
The consultation sets out the Commission's analysis of the definition of shadow banking, including details of the shadow banking entities and activities on which it is currently focusing its analysis. It also provides details of the further work that the Commission is considering in the following areas:
  • Banking regulation.
  • Asset management regulation.
  • Securities lending and repurchase agreements.
  • Securitisation.
  • Other shadow banking entities.
Comments are invited on the consultation by 1 June 2012. Following the consultation, the Commission will decide on the appropriate follow-up to the consultation, which may include legislative measures.
On 19 March 2012, the European Commission published a green paper consulting on the approach it should take towards the regulation of shadow banking entities and activities. It also published a press release and frequently asked questions.
The consultation sets out the Commission's analysis of:
  • The definition of shadow banking, including details of the shadow banking entities and activities on which it is currently focusing its analysis (see Shadow banking entities and activities below).
  • The risks and benefits relating to shadow banking.
  • Challenges posed by shadow banking for supervisors and regulators.
  • Existing EU regulatory measures relating to shadow banking.
The consultation seeks stakeholders' views on the Commission's analysis and the five key areas where it is further investigating options and next steps (see Further work below).
The consultation is intended to complement and feed into international workstreams on the regulation of shadow banking co-ordinated by the Financial Stability Board (FSB) following its October 2011 recommendations on shadow banking (see Legal update, FSB recommendations on shadow banking).

Shadow banking entities and activities

The Commission is currently focussing its analysis on the following shadow banking entities:
  • Special purpose entities that perform liquidity and/or maturity transformation. This includes securitisation vehicles such as asset-backed commercial paper (ABCP) conduits, special investment vehicles (SIV) and other special purpose vehicles (SPV).
  • Money market funds (MMFs) and other types of investment funds or products with deposit-like characteristics.
  • Investment funds, including exchange traded funds (ETFs), that provide credit or are leveraged.
  • Finance companies and securities entities providing credit or credit guarantees, or performing liquidity and/or maturity transformation without being regulated like a bank.
  • Insurance and reinsurance undertakings that issue or guarantee credit products.
It is also considering the following shadow banking activities:
  • Securitisation.
  • Securities lending and repo.

Further work

The consultation sets out five key areas where the Commission intends to undertake further work (in some cases in conjunction with the FSB).
  • Banking regulation. The Commission states that its aim in respect of the banking sector is to:
    • recapture for prudential purposes any flawed risk transfer towards shadow banking entities. The Commission is examining consolidation rules for shadow banking entities to ensure that bank-sponsored entities are appropriately consolidated for prudential purposes;
    • examine ways to identify the channels of exposures, limit excessive exposure to shadow banking entities and improve the disclosure requirements of banks towards exposures to such entities; and
    • ensure that banking regulation covers all relevant activities. This may mean extending provisions in the proposed Capital Requirements Regulation (CRR) to non deposit-taking finance companies. For more information on the CRR, see Practice note, Hot topics: CRD IV.
  • Asset management regulation issues. The Commission is considering the evolution of the ETF and the MMF markets. It suggests that the guidelines being prepared by the European Securities and Markets Authority (ESMA) may address shadow banking issues (see Practice note, Hot topics: Exchange traded funds (ETFs)).
  • Securities lending and repurchase agreements. The Commission is examining current practices, identifying regulatory gaps in existing regulation and looking at inconsistency between jurisdictions. As part of this work, it may consider prudent collateral management, reinvestment practises of cash received against collateralised securities, re-use of collateral (re-hypothecation), ways to improve transparency both in the markets and for supervisory authorities, and the role of market infrastructure.
  • Securitisation. The Commission is reviewing whether existing provisions in EU legislation relating to securitisation have been effective in addressing shadow banking concerns. It is also examining how similar measures can be taken in other sectors, with the main issues identified as transparency, standardisation, retention and accounting requirements.
  • Other shadow banking entities. The Commission is undertaking additional work on other shadow banking entities to:
    • list the entities that could be covered;
    • map the existing regulatory and supervisory regimes in place;
    • identify gaps in these regimes; and
    • suggest additional prudential measures for these entities, where necessary.
    The Commission is also considering data collection issues, the resolution of financial institutions and analysing whether the Solvency II framework will be effective in addressing any issues raised by insurance and reinsurance undertakings performing activities similar to shadow banking activities. For more information on Solvency II, see Practice note, An introduction to Solvency II.

Next steps

Comments are invited on the consultation by 1 June 2012. The Commission is holding a public conference on shadow banking in Brussels on 27 April 2012.
Following the consultation, and work to be carried out by the European Supervisory Authorities (ESAs), the Commission will decide on the appropriate follow-up to the consultation, which may include legislative measures.
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