| LONDON, March 24
LONDON, March 24 European Commission proposals
due to be published on Thursday on how to fund long-term
investments to boost Europe's economies brings the start of a
rehabilitation for the image of "shadow banking", the largely
unregulated market-based provision of credit which lay at the
heart of the financial crisis.
The EC plans envisage engineering a fundamental shift in how
the continent raises money for investment in infrastructure like
roads and technology while at the same time moving away from an
over-reliance on banks for fuelling growth in the economy.
A core element involves reviving securitisation or the
bundling of loans into interest-bearing bonds, a market which
was fatally wounded by its central role in the financial crisis
seven years ago when bonds which packaged up subprime U.S. home
loans became untradable.
Now the market for asset backed securities, currently has
650-700 billion euros worth of bonds in circulation, half its
This shrinkage, coupled with banks being wary of lending as
they rebuild their capital buffers, makes it harder than ever to
seed economic growth in Europe.
In the immediate aftermath of the financial crisis
regulators called for a tough crackdown on the $71 trillion
global shadow banking sector that also includes debt market
repurchase agreements, securities lending, money market
investment funds and some hedge funds.
But with the worst of the crisis now over, government
attention has turned to growth and with it the regulatory mood
music has also changed.
Policymakers are thinking twice about imposing new rules on
one of the few sources of funding that can plug a gap left by
retreating banks and the EU plans are a major milestone in this
change of tack.
"It's a sign that regulators believe one aspect of shadow
banking - securitisation - is something to be encouraged and not
discouraged, but they need to foster private sector
involvement," said David Covey, head of strategy for European
asset-backed securities at Nomura bank.
Last week a top regulator said efforts by global supervisors
to revive securitisation will be intensified with proposals due
soon, a step welcomed by bankers who say clarity on rules is key
to encouraging investors to return to the market.
"If there is regulatory uncertainty, it's very damaging,"
The EC estimates that a trillion euros is needed in long
term finance for transport, energy and telecoms up to 2020 to
boost competitiveness and jobs and hopes that by encouraging
market-based financing it can reduce the continent's reliance on
banks for raising up to 70 percent of funds for the economy.
Some European policymakers look to the United States, where
markets instead fund about 70 percent of the economy, as a model
"There is no single action or 'magic bullet' which will
revolutionise the financing landscape in one go; rather a range
of different responses is required in parallel," the EC said in
a draft of the proposals seen by Reuters last month.
The European Commission will also publish a separate set of
action points to help foster the still tiny crowdfunding sector
and fund more start-up businesses.
FINANCIAL TRANSACTIONS TAX
Shadow banking may also get a boost in other ways this week
when the 11 euro zone countries that have pledged to reach a
deal by May on taxing financial transactions meet.
Some of the countries want to exempt two other parts of the
shadow banking sector, repurchase agreements and securities
lending and borrowing, from the tax, out of fear their inclusion
could crimp a source of funding for the economy.
The developments in Europe come ahead of leaders of the
Group of 20 economies (G20) meeting in November to endorse new
rules for shadow banking. A harsh, uniform approach across all
sectors has now been ruled out, a senior policymaker involved in
the process said.
"Shadow banking was an amplifier but not a cause of the
financial crisis and we don't want to shut it down," he said.
The G20 took tough steps to force banks to hold more capital
but a more "humble, proportionate approach" is now envisaged for
shadow banking, with a focus on gathering data rather than a
"Shadow banking is likely to expand and to a large degree
that is intended and a good thing. We want to preserve an open,
global financial system," the policymaker added.
(Editing by Greg Mahlich)