EU Commission takes aim at shadow banking sector over 2008 meltdown

The EU Commission is taking aim at the shadow banking sector, which it blames for accelerating the financial sector meltdown in 2008.

The Commission has issued proposed regulations that would introduce much stricter conditions for shadow banking entities operating in the EU.

The global shadow banking system is estimated to be worth $51tn and accounts for up to 30% of the global financial system. Hedge funds are the most common type of investment funds that make up the shadow banking system, which are not subject to the same regulations as the conventional banking sector.

Hedge funds, and particularly the practice of ‘shorting stocks’, came in for huge criticism by the EU Commission during the financial crisis. It blamed this speculative play for exacerbating market losses and causing runs on bank shares.

Among the measures included in the Commission communication are much greater transparency with a bigger focus on monitoring risks and intervention where necessary.

All counter parties and those who own the underlying shares will have to be identified in the event of shorting stocks. There will also be a new framework for how the shadow banking system interacts with the banking system.

There is also a raft of new guidelines for money market funds (MMFs) including liquidity ratios. However, the European Banking Federation (EBF) has criticised the proposed regulations for MMFs.

EBF chief executive Guido Ravoet said: “Some of these proposals do not seem particularly well suited to Europe’s reality.

“It is important to strike a sensible balance between the need for greater transparency for investors with increased stability on the one hand while retaining MMFs as important providers of short-term funding for banks, companies and public authorities.”