On the table of the G20 which starts today there is not only the Syria emergency. There is also shadow banking, i.e. the parallel banking system that hit the headlines with the 2008 financial crisis but which even today remains a source of systemic risk because it plays an active role in financing the economy. In shadow banking, some intermediaries such as hedge funds, money market funds or structured investment vehicles provide credit to the financial sector but, unlike banks, do not have access to central bank support or safeguards in terms of deposit insurance or debt guarantees . A sector that according to 2011 estimates by the Financial Stability Board accounts for 51 trillion euros, equal to 25-30% of the entire financial system and half of banking assets (Eurozone almost 17 trillion, United Kingdom almost 7 trillion, United 17 trillion and a half). However, the G20 countries would aim to regulate it through a soft approach to avoid repercussions on global financial flows given the role that shadow banking still plays in providing liquidity to the banking sector which is still too fragile.
Meanwhile, the European Commission has just approved the proposals for a tightening of the sector which provide for greater transparency and more stringent liquidity conditions for monetary funds. In Europe, money market funds alone hold around 22% of short-term debt securities issued by administrations or companies and 38% of those issued by the banking sector. A systemic role from which the need for regulation derives. Although it is not a question of "accusing him", noted the EU commissioner for the internal market Michel Barnier, a "regulatory operation is necessary, because we owe it to the citizens". "We want to avoid entities offering products similar to those of banks without being subject to the rules of the banking sector," explained the European Commissioner. The communication adopted by Brussels therefore calls for more transparency, imposing the collection of detailed data, legislation on financial instruments and risks associated with securities financing transactions, and the definition of a framework for interactions with banks. A crackdown on money market funds is then proposed, demanding stricter liquidity requirements so that, in the event of capital withdrawals, they are able to repay investors without bringing the system down. In particular, the funds must hold at least 10% of assets maturing daily and another 20% maturing weekly, while they may not have an exposure of more than 5% in value to a single issuer. In addition, a capital buffer of 3% must be guaranteed for constant net asset value funds.
Here, however, for some the Commission could have done more. “These funds play a useful role and the regulations address essential risks without compromising our sector” particularly relevant in Luxembourg and Ireland, Barnier stressed. On the opposite side within the FEB, the European Federation of Banks (FEB), instead, "concerns" emerged about the consequences of the proposals regarding money market funds, judged restrictive and difficult to implement for the funds, whose resources "can be used by banks to support loans to the real economy”. In any case, Feb welcomed the intervention of the European Commission on the parallel banking system. "The same rules - said the deputy director general Robert Priester - must be applied to the same activities".
The approval process for these rules will take about three years. In the meantime, Barnier points out, "the EU continues with tenacity to build an effective and I hope intelligent agenda of market regulation and supervision". The goal is to prevent some banking activities from being diverted to less regulated sectors, so as to escape supervision, creating uncertainties and potential risks for the entire economic and financial system.
In the meantime, as mentioned, the G20 is also working on the issue with the aim of concentrating on activities and not on subjects in the sector. In other words, no capital enhancements as happened with bank regulation. "Increasing capital would not work in many cases because it does not concern entities but above all markets, interconnected transactions and networks," Andres Portilla, head of regulatory affairs at the Institute of International Finance (IIF), a banking lobby, told Reuters and Washington Insurance. For Alistair Milne, a lecturer in financial economics at Loughborough University and a former Bank of England member and UK Treasury official, they may take a little longer. Reforming the shadow banking sector is about more than not having problems in the future."
