The EBA has a mandate to develop guidelines to set appropriate aggregate limits or tighter individual limits on exposures to shadow banking entities which carry out banking activities outside a regulated framework.
Shadow banking entities are generally not subject to the same standards of prudential regulation as regulated entities, do not provide protection to investors’ against these entities’ failures, and do not have access to central banks’ liquidity facilities. Institutions’ exposures to such entities undertaking bank-like activity may lead to regulatory arbitrage concerns. These entities, which are potentially more vulnerable to runs and/or liquidity problems, tend to be highly correlated and interconnected with the banking sector, which leads to financial stability concerns.
To minimise the risks posed to institutions arising from their exposures to shadow banking entities, the guidelines lay down requirements for institutions to set limits, as part of their internal processes, on their individual exposures to shadow banking entities. The guidelines define the terms ‘shadow banking entities’, ‘banking activities’ and ‘regulated framework’.