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EU Defends Shadow Banking Regulation Proposals

Europe is one of the world’s top emerging markets for alternative lending, considered a crucial alternative to traditional banks as businesses, especially SMEs, struggle to manage their working capital. But as alternative lenders become more mainstream, authorities are exploring how to regulate what has been deemed the “shadow banking” sector while preserving its visibility to borrowers.

Last March, the European Banking Authority launched a public consultation on proposed guidelines to regulate shadow banking aimed at limiting EU institutions’ exposure to such financing vehicles. According to the EBA, the proposals would be used to help the European Commission in its own efforts to establish appropriate guidelines or the sector.

While the consultation is still ongoing for another month, the EBA’s director of regulation Isabelle Vaillant spoke Monday (May 19) to defend the entity’s proposed guidelines, which some authorities criticize as too broad. For EU authorities, the shadow banking sector includes alternative funds and securitization vehicles. EU officials said that money market funds, included in the definition of shadow banking, could be eventually removed from the guidelines.

But according to the EBA, limiting mainstream banks’ exposure to shadow lenders will strengthen confidence in the EU’s financial system without hampering lending. “There is no negative in being in the shadow-banking definition,” Vaillant said during a public hearing on the matter. “We are trying to push for confidence.”

The official added that the proposals are meant to ensure that mainstream banks have enough capital to act as a buffer, should shadow banks lead to problems. The EBA wants shadow banking to be capped at one-quarter of that capital buffer for banks.

Some critics also argue that this limit will be too easily breached by banks considering the rise of assets being moved to asset managers in the wake of big bank clampdowns. Proponents of the rules, however, say they will not hamper the shadow banking sector. European Central Bank financial stability expert Alexander Hodbod told Reuters that the proposals accept shadow banking as a “spare tire” in times of stress in the mainstream banking market.

“You need to have boundaries between the two sides,” he said.

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