Friday

10th Apr 2020

EU still unsure what 'shadow banking' really is

  • Easy credit and mortgages were one of the causes of the 2008 financial crisis (Photo: Jeremy Brooks)

The EU is considering new rules on so-called shadow banking - unregulated investment funds and mortgage institutions - but it still has to define exactly what type of financial activities it covers.

"Shadow banking is a parallel banking system for which we do have to create effective regulation and supervision, otherwise the financial markets may well transfer part of their activities and products to this unregulated market and increase the risk of new crises," financial markets commissioner Michel Barnier said Monday (19 March).

Read and decide

Join EUobserver today

Support quality EU news

Get instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

Five years after the collapse of the Lehman Brothers investment bank, which triggered the global financial crisis, the EU commission is still working on regulation aimed at curtailing risks in the financial markets.

Shadow banking - a term encompassing simple services such as mortgages, loans given without deposit, and complex investment schemes run by hedge funds - represents some 25-30 percent of the world's banking sector and its share is increasing in Europe, Barnier said.

"We have to define the term firstly. We want to act, but first we need to understand it and to see if our list is complete," the commissioner said.

Asked if he was concerned that the slow response after the 2008 crisis still leaves Europe exposed to risks, Barnier said: "Yes, I am concerned. We are still learning the lessons of Lehman Brothers. We are not out of the woods yet, we have to be honest about it."

He admitted that the legislative process is "slower than the markets", since it takes over a year to adopt new legislation from the moment it has been tabled.

Barnier said that amendments to existing legislation or draft legislative proposals may be tabled by the end of the year so as to cover all 'shadow banking' activities.

But German investment funds have criticised the commission's approach. The German Association of Investment and Asset Management (BVI) said oversight of unregulated financial instruments and institutions was overdue, but its head, Thomas Richter, said investment funds are already covered by other legislation. "Our industry certainly cannot complain about a lack of regulation," he said in a statement.

One expert in financial services told this website that the consultation paper reflects a US view that these services are not regulated at all.

"The question is what they mean by shadow banking. In the US, shadow banking concentrates on products that are highly regulated here in Europe. So this exercise is totally useless," Diego Valiante from the Brussels-based Centre for European Policy Studies said.

In the US, treasury secretary Timothy Geithner earlier this month warned against the risks posed by this sector: "A large shadow banking system had developed without meaningful regulation, using trillions of dollars in short-term debt to fund inherently risky financial activity."

The commission plans to end the consultation by 1 June and organise a conference on shadow banking on 27 April.

EU clamps down on shadow banking

EU commissioner Barnier has laid out plans to regulate the shadow banking sector, seen as playing a major role in the 2008 financial crisis.

No breakthrough at EU budget summit

EU leaders failed to reach agreement on the EU's long-term budget, as richer states and poorer 'cohesion countries' locked horns. The impasse continues over how to fund the Brexit gap.

EU leaders struggling to break budget deadlock

Cuts to innovation, space, neighbourhood and other programme-spending push down the latest budget proposal on the table of EU leaders. Rebates could stay on, to win the support of the net-payers for a deal.

Unhappy EU leaders begin budget haggle

EU leaders arriving at the Brussels summit criticised the budget proposal of EU Council president Charles Michel, as richer member states insisted holding onto their rebates, while poorer countries wanted to avoid deep cuts to their subsidies.

News in Brief

  1. Migrants trapped on boat in Tripoli due to shelling
  2. EU anti-crisis budget 'could be up to €1.5 trillion'
  3. Western Balkan states appeal for EU help with masks
  4. Spain's lockdown could be extended until 10 May
  5. IMF: Pandemic crisis will be worse than great depression
  6. German economy minister expects progress on EU deal
  7. Italian PM: EU is at risk if no deal on recovery plan
  8. Belgian region to block EU Green Deal

Coronavirus

ECB promises (almost) whatever it takes

The eurozone's central bank has promised to buy up to €750bn of government and private bonds in new pandemic counter-measures.

Opinion

What does coronavirus 'Black Swan' mean for markets?

Falling demand and prices for oil and raw materials will revive the risk of deflation. The collapse in international trade and long-term rethinking of China's role as the major hub for the production of consumer goods and electronics is inevitable.

Stakeholders' Highlights

  1. UNESDAMaking Europe’s Economy Circular – the time is now
  2. Nordic Council of MinistersScottish parliament seeks closer collaboration with the Nordic Council
  3. UNESDAFrom Linear to Circular – check out UNESDA's new blog
  4. Nordic Council of Ministers40 years of experience have proven its point: Sustainable financing actually works
  5. Nordic Council of MinistersNordic and Baltic ministers paving the way for 5G in the region
  6. Nordic Council of MinistersEarmarked paternity leave – an effective way to change norms

Latest News

  1. How the EU's virus-alert agency failed
  2. Flemish nationalists torpedo Belgium Green Deal pledge
  3. Eurozone agreed €500bn cushion against virus blow
  4. Why Europe must act now, and on a big scale
  5. EU court blocks Poland's bid to 'frighten' judges
  6. Coronavirus sees approval-rating soar for EU leaders
  7. EU science chief who 'quit' had been told to resign
  8. EU delays 'exit strategies' plan, as WHO urges caution

Join EUobserver

Support quality EU news

Join us