Further to the release of its Green Paper on Shadow Banking in March 2012, the European Commission has followed-up with a Communication on Shadow Banking entitled "Shadow Banking - Addressing New Sources of Risk in the Financial Sector". The Communication provides a comprehensive overview of the measures taken by the European Commission to date to address existing and potential systemic risk in the area of shadow banking, and sets out a Roadmap for future work which includes increasing transparency, improving the framework for certain investment funds, reducing the risks associated with securities financing transactions, strengthening the prudential banking framework in order to limit contagion and arbitrage risks, and establishing more effective supervision of the shadow baking sector. The Communication notes that the Commission has contributed to the global work of the Financial Stability Board (FSB) in this area (see the summary immediately above) and that its conclusions are "fully consistent with the FSB's orientations". Key issues in the shadow banking sector identified by the Commission are its size (aggregate shadow banking assets - €51 trillion in 2011 - are estimated at approximately half the size of the regulated banking system), and the interconnectedness between shadow banks and the regulated sector. The first measure to be taken under the Roadmap is a Proposal for a Regulation on Money Market Funds (MMFs) which aims to strengthen the quality and liquidity of the asset portfolios held by MMFs (including ABCP, holdings of which are limited to 10% of an MMF's assets) operating under the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS) or the Alternative Investment Fund Managers Directive (AIFMD), and establishes a new 3% capital buffer to address gaps in asset valuations. Other shadow banking initiatives will focus on improving data collection and exchange, developing central repositories for derivatives with the EMIR framework, implementing the Legal Entity Identifier (LEI) project, the establishment of a central data repository for repurchase transactions, strengthening the UCITS framework and requiring banks to report on exposures to unregulated entities. The Commission also encourages national authorities to maintain constant vigilance and be equipped with tools to monitor local developments in shadow banking and respond to them in a timely manner. The Communication makes clear that, for securitisation transactions, "strengthened securitisation arrangements" are already underway (in the form of risk-retention and enhanced capital adequacy requirements for securitisations under the Capital Requirements Directive, enhanced accounting requirements, enhanced European Central Bank collateral requirements, new labelling standards under the Prime Collateralised Securities Initiative, and Solvency II, AIFMD and UCITS all providing important safeguards), and that an enhanced framework for Credit Rating Agencies is now operational (under CRA III). As a result, the Communication itself does not appear to make any new proposals directly affecting the securitisation sector. A set of Frequently Asked Questions published alongside the Communication provide additional detail on the Commission's approach to shadow banks.

Useful links

Green Paper on Shadow Banking

Communication on Shadow Banking

Proposed Regulation on MMFs

Frequently Asked Questions