Green Paper on Shadow Banking – Frequently asked questions
European Commission - MEMO/12/191 19/03/2012
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Brussels, 19 March 2012
Green Paper on Shadow Banking – Frequently asked questions
1. What is shadow banking?
Shadow banking is the system of credit intermediation that involves entities and activities that are outside the regular banking system, and thus are not regulated like banks.
"Shadow banking" entities operate outside the regular banking system, and yet engage in the following bank-like activities:
Shadow banking activities are those that could act as important sources of funding for non-bank entities. These activities include securitisation, securities lending and repurchase transactions ("repo").
2. What is the size of the shadow banking sector?
The Financial Stability Board (FSB) has roughly estimated the size of the global shadow banking system at around €46 trillion in 2010, up from €21 trillion in 2002. This represents 25-30% of the total financial system, and half the size of bank assets. In Europe, the proportion of these other financial intermediaries' assets is lower than the global average (13% in UK, and 5% in Germany, for example, compared to an estimated 35-40% in the United States). However, according to FSB estimates, the share of these assets in Europe has sharply increased in recent years, while it is falling elsewhere, including in the US. Shadow banking is therefore a growing concern for Europe's financial system.
3. Who are the shadow banking entities and what are the shadow banking activities addressed in the consultation?
Shadow banking entities include:
Shadow banking activities include:
For the moment, at the consultation stage, the Commission is focusing on these possible shadow banking entities and activities. However, this list should not be viewed as exhaustive, as shadow banking entities and activities can evolve very rapidly.
4. Are shadow banking activities dangerous?
Shadow banking activities are a useful part of the financial system:
At the same time, shadow banking entities and activities may also create a number of risks:
Some of these risks can be systemic in nature, in particular due to the complexity of shadow banking entities and activities, their cross-jurisdictional reach and the inherent mobility of securities and fund markets, and the links between shadow banking entities and activities with the regular banking system. It is the Commission's objective to ensure that those risks are dealt with appropriately, while maintaining the useful functions performed by shadow banks.
5. What is the international context of the Commission's consultation?
At its November 2010 Seoul Summit, the G20 leaders identified the financial sector regulation issues still to be addressed. Regulation and supervision of shadow banking was one of these issues. The G20 requested that the Financial Stability Board (FSB), in collaboration with other international standard-setting bodies, develop recommendations to strengthen the oversight and regulation of the shadow banking system.
In response, the FSB released a report on 27 October 2011 highlighting that the disorderly failure of shadow bank entities can carry systemic risk, both directly and through their links with the regular banking system. The FSB also suggested that as long as such activities and entities remain subject to a lower level of regulation and supervision than the rest of the financial sector, reinforced banking regulation could drive a substantial part of banking activities beyond the boundaries of traditional banking and towards shadow banking.
Building on this report and on the invitation of the November 2011 G20 Cannes Summit to develop its work further, the FSB has also initiated five workstreams to analyse the issue in more detail and develop effective policy recommendations. These workstreams bring together the EU and other major jurisdictions including the US, China and Japan, which are each considering appropriate regulatory measures.
6. What are the challenges for supervisory and regulatory authorities?
Given the potential risks posed by shadow banking, it is essential that supervisory and regulatory authorities consider how best to address shadow banking entities and activities. However, this task presents various challenges.
First, the authorities concerned have to identify and monitor the relevant entities and their activities.
Secondly, the authorities have to determine the approach to supervising shadow banking entities.
Thirdly, as shadow banking issues may require extending the scope and nature of prudential regulation, appropriate regulatory responses are needed.
7. What regulatory measures apply to shadow banking in the EU?
In the EU, a number of legislative proposals with implications for shadow banking entities and activities are already in place or currently being negotiated by the European Parliament and the Council:
Some Member States also have additional national rules for the oversight of financial entities and activities that are not regulated at EU level.
8. What are the issues which the Commission is examining?
There are five key areas where the Commission is further investigating options and next steps:
9. What are the next steps envisaged by the EU?
On the basis of the outcome of this consultation and taking into account any relevant work carried out by the European Systemic Risk Board (ESRB), the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), the Commission will decide on the appropriate follow-up regarding the shadow banking issues outlined in this Green Paper, including legislative measures, as appropriate. The Commission will continue to engage in ongoing international work, including ensuring any level playing field concerns are addressed. Any regulatory follow-up will be accompanied by a careful assessment of its potential impacts and will also take into account the results of the work of the high-level expert group on structural banking reforms recently appointed by the Commission. After the publication of the group's report, the Commission will assess the need for additional, targeted consultations on selected issues, as necessary.
Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, OJ L 145, 30.4.2004, p. 1–44.
Directive 2011/61/EC of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ L 174, 1.7.2011, p.1.