LONDON Feb 16 Financial operators on the
fringes of the traditional bank system could be made to hold
more capital and mainstream banks forced to limit exposure to
risk in the $60 trillion shadow banking sector, a draft EU paper
In the draft consultation document obtained by Reuters, the
bloc's executive European Commission said shadow banking,
including money market funds, exchange-traded funds, repurchase
agreements and securities lending, could play a "potentially
But the Commission said the financial crisis showed they
pose major risks to financial stability if they fail in a
"As long as such activities and entities remain subject to a
lower level of regulation and supervision than the rest of the
financial sector, reinforced banking regulation could drive a
substantial part of banking activities beyond the boundaries of
traditional banking and towards shadow banking," the paper said.
Brussels is keeping an eye on how far global initiatives
progress in making the sector more transparent before committing
itself to concrete action.
World leaders from the G20 countries have asked their
regulatory task force, the Financial Stability Board (FSB), to
come up with recommendations for regulating shadow banking,
which involves credit, leverage and deposit-like funding on a
large, lightly regulated scale.
The draft paper examines steps the EU has taken to regulate
parts of the shadow banking sector as regulatory bodies have
already begun to build up expertise in shadow banking.
"However, it would appear that the EU will need to go
further in establishing permanent structures for the collection
and exchange of information on identification and supervisory
practices between the Commission, the European Central
Bank(ECB),other central banks and all EU supervisors," it said.
New powers for supervisors may be needed.
"The Commission considers that a specific approach to each
kind of activity must be adopted," the paper added.
Approaches would range from simple registration, ongoing
supervision, indirect and direct regulation and extending
"macroprudential" prudential supervision to the sector, such as
by raising capital requirements to dampen frothy activities.
Ways to limit or discourage exposures to shadow banking
entities are being examined.
Banks may need to include their shadow banking entities in
calculating capital and liquidity buffers and leverage limits
under the new global Basel III bank rules. EU banking rules,
which determine how much capital lenders must hold, are
currently limited to institutions that take deposits and provide
credit but could be extended to shadow bank entities.
The Commission is also looking at whether wind-down
mechanisms are needed for shadow bank entities.
The EU executive is due to publish its consultation paper as
soon as next month and hold a public hearing in Brussels on
April 27. It will then take into account the FSB's work before
assessing its own next steps.