EU outlines plans to curb shadow banking
Michel Barnier - Photo EC
(BRUSSELS) - The European Commission fleshed out Wednesday its first detailed proposals to regulate so-called "shadow" banking, a behemoth holding tens of trillions in euros and sterling -- and half of all bank assets globally.
European Union Markets Commissioner Michel Barnier tabled legislative proposals meant to reduce the systemic risk from a future run on Money Market Funds (MMFs), the specialist niche used by banks, governments and major corporates.
"We want to shine a light on the shadow banking sector where it is most urgently needed," said Barnier, who has pushed through a series of painfully-negotiated bank sector reforms aimed at preventing a repeat of the global financial crisis.
"Sometimes that means shining that light on people that don't like being under it," the former French foreign minister told a press conference.
"But they're just going to have to get used to that," he said.
MMFs are big buyers of bank, government and corporate short-term debt. They operate across the financial markets globally, taking on and managing risk for a profit, largely out of sight of regulators.
Barnier said that bringing Europe's some 8,300 banks under stricter control, it made no sense to leave this arms-length operation free to play fast and loose.
"The biggest fund holds 50 billion (euros) itself," he said, with just a couple of hundred major players dominating the market.
"If that fund hit difficulties, the whole system would be at risk."
He said this was "an illustration of what we intend to apply to other areas of the shadow banking sector," estimated by the Financial Stability Board (FSB) to account for around a quarter of the entire global financial system.
Under the proposals -- likely to be sharply contested by the industry -- MMFs would be required to hold at least 10 percent of their portfolios in assets that can be liquidated within one day, and another 20 percent within a week.
In that way, they would be well placed to respond quickly to any demand for redemptions by investors.
Funds that guarantee constant returns, leaning on bank sponsor support, would be required to boost capital buffers to the equivalent of 3.0 percent of all assets under management.
Shadow banking has been identified by the G20 as a priority area for ongoing risk reduction in the global financial system.
EU roadmap for tackling the risks inherent in shadow banking - background guide
Proposed new rules for money market funds (MMFs)