LONDON (Reuters) - The European Union may apply its mandatory capital rules for banks to a wider set of institutions to cover risks in “dark corners” of the financial system, an EU draft document said.
The document has been written by the bloc’s European Commission and is due to be published next Wednesday.
It outlines possible reforms to regulate “shadow banking”, or lightly supervised intermediaries outside mainstream banks that generate trillions of euros to finance the economy through securities lending, repurchase markets and securitization.
Extending the scope of capital rules to shadow banks would respond to EU lawmaker concerns that similar activities should be regulated in the same way, the document obtained by Reuters said.
“It is not possible to discuss shadow banking without considering the scope of application of the EU banking prudential rules,” the document said.
The European Banking Authority, an EU watchdog, will be asked to assess the size of financial entities that fall outside the scope of current bank capital rules, the document added.
Globally the shadow banking sector is estimated at around $60 trillion, with $31 trillion in the EU.
The document, which may be revised prior to publication, says the commission will also look at risks from “certain investment techniques and strategies” used by mutual, exchange- traded and other funds.
“In particular, the review will examine how investment funds use securities financing transactions. Funds will have to ensure that use of this type of transaction does not impair their liquidity,” the document said.
The commission may propose a securities law to regulate how securities are re-lent throughout the financial system, making it difficult to know who actually owns them.
The collapse of Lehman Brothers bank in 2008 highlighted this problem, showing how a default of a large institution may destabilize securities markets, the document said.
The European Commission will also publish its first draft law on Wednesday September 4 to toughen up supervision of another part of the shadow banking sector - money market funds.
Editing by Laurence Fletcher and David Holmes