EU Commission to introduce rules to strengthen oversight of shadow banking
The global shadow banking sector was estimated to contain assets of approximately 51 trillion Euros in 2011 (currently $67 trillion), or nearly a third of the overall financial system and half the size of bank assets, according to the latest figures available from the Financial Stability Board. About a third of the sector's assets are held by firms in the U.S. and some 45 percent in the 28-country European Union.
The ultimate goal of the massive EU legislation, in the form of the various regulatory components, will together form the outline of a EU Banking Union. The goal is to stabilize the EU financial system and to make sure that governments no longer have to bail out financial institutions in time of crisis.
Therefore, the European Union is trying to boost oversight of shadow banking, a sector of the financial system that holds trillions of dollars in assets but is not bound by the same rules as banks.
The EU Commission says investment vehicles such as money-market funds or hedge funds active on credit markets are desirable because they offer additional sources of financing for the economy, but they can also pose threats to long-term financial stability.
Commissioner Michel Barnier is set to introduce rules and regulations to govern the growing financial sector. The commissioner continues to maintain that many of the funds resemble banks in their operations by taking deposits and lending money; therefore they should be subject to the rigorous oversight banks rules and mandates.
Due to the size and the associated risks the commission wants to make sure that banking activities do not flow to less regulated parts of the financial sector. Another reason for the excessive monitoring and compliance is that they are both highly liquid and indispensable for the economy. Therefore, an individual money market fund is a significant fund of systemic relevance.
The Commission's new set of rules specifically target money-market funds, which are an essential refinancing tool for Europe's economy. The funds invest in short-term debt issued by banks, governments or companies and can have a value of up to 50 billion euros ($66 billion) each.
The legislation will force the funds to keep a minimum of 10 percent of assets maturing overnight, and 20 percent within one week, to guarantee they have sufficient liquidity to pay back investors at any point in time. The issue is crucial because if a fund is not able to pay out its investors, it has to suspend its operations, a move that can disrupt the wider financial system due to the size of the funds involved.
The Commission says its proposals are in line with similar recommendations drawn up by the Financial Stability Board that are expected to be presented and approved prior to the year end 2013.
Source: EU Commission and AP
