ECB's Liikanen says regulation could be extended to shadow banks

Bank of Finland Governor Erkki Liikanen, who led the group of academics and experts set up by the European Commission (L) and Michel Barnier, the European Commissioner in charge of regulation hold a joint news conference in Brussels October 2, 2012. REUTERS/Eric Vidal

HELSINKI (Reuters) - Major organizations that carry out banking activities, but are not banks, may become so important to the financial system that they need to be regulated like traditional banks, a European Central Bank governing council member said on Saturday.

Financial regulators are seeking to shine a light on so-called “shadow banking”, a 24-trillion-euro ($33 trillion) industry in Europe - half the world’s total - that comprises money market funds, some hedge funds, and firms involved in securities lending and repurchase markets.

Such groups borrow and lend like banks, but because they are not banks they often fall outside the remit of regulators.

Speaking at the Finnish Social Forum, Erkki Liikanen said there was a risk that tighter banking regulation in the aftermath of the global financial crisis could lead to growth in unregulated shadow banking.

If markets then began to expect that shadow banks would have to be bailed out with public funds to prevent a financial sector collapse, the problem would not have not been solved, Liikanen said, adding that authorities were following developments.

“Such proactive measures as applying systemically-important financial institution definition and extending that regulation and supervision also to the shadow banking sector could be taken if necessary,” Liikanen said in the text of a speech.

Systemically-important banks face higher capital requirements than smaller banks under new rules, called Basel III, which are currently being phased in.

Liikanen, who also heads the Bank of Finland, has been closely involved in banking regulatory reforms and led the EU working group on banking sector reforms, which sought to curb banking risks.

($1 = 0.7227 Euros)

Reporting by Sakari Suoninen; Editing by Mark Potter