This document is an excerpt from the EUR-Lex website
Document 52013DC0614
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Shadow Banking – Addressing New Sources of Risk in the Financial Sector
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Shadow Banking – Addressing New Sources of Risk in the Financial Sector
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Shadow Banking – Addressing New Sources of Risk in the Financial Sector
/* COM/2013/0614 final */
COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT Shadow Banking – Addressing New Sources of Risk in the Financial Sector /* COM/2013/0614 final */
COMMUNICATION FROM THE COMMISSION TO
THE COUNCIL AND THE EUROPEAN PARLIAMENT Shadow Banking – Addressing New Sources of
Risk in the Financial Sector Introduction Since the financial crisis began in
2007/2008, the European Commission has undertaken the biggest reform of
financial services ever seen in Europe. The aim is to restore sustainable
health and stability to this sector by addressing the shortcomings and
weaknesses highlighted by the crisis. The Commission's approach consists of tackling
all financial risks, globally and comprehensively, and ensuring that the benefits
achieved by strengthening certain actors and markets are not diminished by
financial risks moving to less highly regulated sectors. Such regulatory
arbitrage would greatly undermine the impact of the reforms. The Commission has
therefore published a Green Paper on shadow banking in March 2012[1], with a view to gathering input
on how best to tackle risks stemming from credit intermediation that involves entities
and activities outside the regular banking system. The shadow banking sector also features
high on the international agenda. G20 Leaders have asked the Financial
Stability Board (FSB)[2]
to look into shadow banking in order to identify the main risks and make
recommendations. The overarching aim, as reaffirmed on several occasions by the
G20, is to eliminate all the dark corners in the financial sector and extend
"regulation and oversight to all systemically important financial
institutions, instruments and markets[3]". The first FSB recommendations will be
endorsed by G20 Leaders in St. Petersburg on 5-6 September 2013. The Commission
has very actively contributed to the FSB work and the conclusions outlined in
this communication are fully consistent with the FSB’s orientations. Following consultation on the Green Paper
and at a time when financial regulation is set to be significantly reinforced
and enhanced in Europe, the Commission wishes to set out its roadmap for the
coming months which is aimed at limiting the emergence of risks in the
unregulated system, in particular risks of a systemic nature[4]. These could arise especially through
the shadow banking sector’s interconnectedness with the regulated financial system.
While the notion of "shadow
banking" has only recently been formally defined in the G20 discussions,
the risks related to it are not new. The Commission together with the European co-legislators
has already implemented or is in the process of implementing a number of
measures to provide a better framework for these risks, such as the rules
governing hedge fund activity[5]
and reinforcing the relationship between banks and unregulated actors[6]. This Communication outlines a number of priorities
where the Commission intends to take initiatives such as transparency of the shadow
banking sector, establishment of a framework for money market funds, reform of rules
for undertakings for collective investment in transferable securities
(UCITS), securities law and the risks associated with securities financing
transactions (principally securities lending and repurchase transactions) and establishment
of a framework for interactions with banks. Furthermore, particular attention
will be paid to supervisory arrangements in order to ensure that all major risks
are adequately addressed. Moreover, certain areas require further analysis and
will be clarified later this year, particularly on the basis of the Commission
services’ analysis and the work of the G20. 1. The debate on shadow
banking 1.1. Importance of shadow
banking in the context of financial reform in the EU ·
What is shadow banking? Regulators define shadow banking as a
system of credit intermediation that involves entities and activities
outside the regular banking system[7].
It includes entities which: –
raise funding with deposit-like characteristics; –
perform maturity and/or liquidity
transformation; –
allow credit risk transfer; –
use direct or indirect leverage[8]. Shadow banking activities, in
particular securitisation, securities lending and repurchase transactions, constitute
an important source of finance for financial entities. ·
Why take a particular interest in this system? In addition to risks associated with
circumventing existing rules and the fact that these entities/activities can foster
the surreptitious accumulation of high levels of debt in the financial sector,
shadow banking needs to be monitored because of its size, its close links to
the regulated financial sector and the systemic risk that it poses. The first factor is size. Even if not
entirely accurate, estimates of the size of the shadow banking system, both in absolute
terms and as a share of the global financial sector, show that some of its
components could be systemically significant. The latest studies by the FSB[9] indicate that the aggregate amount
of shadow banking assets, proxied by the statistical category “other financial
intermediaries”, is about half the size of the regulated banking system.
Despite the fact that shadow banking assets have decreased slightly since 2008,
the total figure in 2011 was EUR 51 000 billion. In terms of geographical
distribution, it is concentrated in the United States (around
EUR 17 500[10]
billion) and in the EU[11]
(Eurozone with EUR 16 800 billion and the United Kingdom with
EUR 6 800 billion). The second factor which increases risks is
the high level of interconnectedness between the shadow banking system and the rest
of the financial sector, particularly the regulated banking system. Any
weakness that is mismanaged or the destabilisation of an important actor in the
shadow banking system could trigger a wave of contagion that would affect sectors
subject to the highest prudential standards. Ultimately, the aim is to ensure that the
potential systemic risks to the financial sector are properly covered and that opportunities
of regulatory arbitrage are limited in order to strengthen market integrity and
increase the confidence of savers and consumers. 1.2. Responses to the
Commission's Green Paper The numerous contributions received
following the publication of the Green Paper[12]
and the European Parliament's own-initiative report[13], which has added substantial
value to the debate, highlight the importance of this issue to the financial system,
the non-financial industry and public authorities. A majority of respondents strongly supported
initiatives aimed at laying down clearer rules for shadow banking. Many called
on the Commission to adopt a proportionate approach that focuses, as a
priority, on the activities or entities posing a high level of systemic risk to
the economic and financial sector. This approach should, as far as possible,
use the existing EU legal framework in order to ensure coherence and
continuity. The proposed definition of shadow banking set
out in the Green Paper met with general approval by respondents. Some
observers would have preferred a more specific definition but others stressed the
importance of having a broad and flexible definition able to adapt to changes
in the system. Many contributors were however unhappy with the term
"shadow banking" which they felt has negative connotations. The
Commission notes these concerns but itself uses the term neutrally and free of
connotations. At this stage however it is very difficult to introduce alternative
terminology, since this is by now a well-established term in the international
debate. There is a consensus on the need to reduce opportunities
for regulatory arbitrage between the highly regulated sectors and other market
segments where certain similar financial activities could be performed without
being subject to the same level of regulation. The Commission's overarching aim
is to implement a coherent approach that involves applying similar rules to
activities that present similar risks. 2. Are the reforms
undertaken an adequate response to the risks inherent in shadow banking? The Commission has set in motion an
ambitious and unprecedented financial reform programme to which the European
Parliament and the Council have given priority in terms of their role as
co-legislators. 2.1. Measures aimed at financial
entities ·
Reinforcement of requirements imposed on banks
in their dealings with the shadow banking system Shadow banking entities can, to some
extent, be monitored through their relationships with banks. Two sets of requirements
are particularly important in this respect: requirements related to
transactions concluded between banks and their financial counterparties and the
accounting rules on consolidation. First, measures have been taken to ensure
that the interests of the persons initiating securitisation transactions are
firmly aligned with those of the end investors. Since CRD II[14] entered into force at the end
of 2010, credit institutions are obliged to check that the originator or
sponsor institution of a transaction has an economic interest equivalent to at
least 5% of the securitised assets. CRD III[15]
then reinforced the capital requirements for the risks associated with
securitisation transactions, particularly when these structures involve several
levels of securitisation, and increased the prudential requirements for support
given to securitisation vehicles[16].
Secondly, the accounting requirements
regarding transparency also play an important role insofar as they allow
investors to identify the risks borne by banks and their exposures to the shadow
banking sector. The accounting standards on consolidation, in particular,
determine whether or not an entity must be included on a bank's consolidated
balance sheet. The amendments made by the IASB to the provisions of IFRS 10, 11
and 12, which will enter into force in Europe in 2014, will develop the
accounting consolidation requirements and increase disclosure regarding
unconsolidated structured entities. Furthermore, the Basel Committee has
embarked on a review of prudential consolidation practices and will publish its
conclusions by the end of 2014. The Commission is following these developments
closely. In 2010 the IASB strengthened disclosure
requirements relating to off balance sheet exposures in the case of transfers
of financial assets, which came into effect in Europe as from 1 July 2011 (IFRS
7). During the crisis, the lack of information on this type of commitment meant
that investors and banking authorities were unable to correctly identify all
the risks borne by banks. ·
Reinforcement of requirements imposed on
insurance companies in their dealings with the shadow banking system The Solvency II
Directive[17]
also addresses a number of shadow banking issues through its risk-based
approach, as well as by imposing strict risk management requirements, including
a "prudent person" principle for investments. Like EU banking legislation,
it provides for a total balance sheet approach where all entities and exposures
are subject to group supervision. Certain
activities such as mortgage loan insurance[18],
agreements on liquidity swaps with banks and direct granting of loans may raise
specific concerns. The provisions relating to risk management and the capital
requirements which will be specified in the technical measures implementing
Solvency II. This will ensure that the risks inherent in these activities will
be sufficiently covered and that opportunities for regulatory arbitrage will be
limited. The Solvency II Directive establishes, in particular, that direct
loans will be subject to capital requirements and that the creation of
securitisation vehicles will need authorisation by supervisory authorities. The
implementing rules of this Directive will include authorisation and on-going
regulatory requirements relating to solvency, governance and reporting as far
as insurance special purpose vehicles (SPVs) are concerned. ·
A harmonised framework for alternative
investment funds managers Europe has already
taken action with regard to financial actors who were previously not subject to
regulation at EU level. The Alternative Investment Fund Managers Directive
(AIFMD)[19]
establishes harmonised requirements for entities responsible for managing and
administering this kind of funds. Since 22 July 2013, these rules have to apply
to all hedge funds, private equity and real-estate funds[20]. In order to receive approval, a manager
must comply with requirements in terms of capital, risk and liquidity
management, the appointment of a single depositary and rules on transparency to
investors and supervisors. Leverage will be subject to special monitoring. If it
proves to be excessive with regard to the risks to the stability of the
financial system, the national authorities, on the recommendation of the
European Securities and Markets Authority (ESMA), could impose limits on the
use of leverage. 2.2. Measures undertaken to strengthen
market integrity ·
A framework for risk transfer instruments Contagion between the regulated financial
system and shadow banking can be serious and made worse by the lack of
transparency, particularly in times of stress. The financial crisis has
revealed the central role played by over-the-counter (OTC) derivatives, such as
credit derivatives. The Regulation on OTC derivatives, central counterparties
and trade repositories[21]
(known as “EMIR” - European Market Infrastructure
Regulation) requires the central clearing of all
standardised derivative contracts, as well as margin calls for non-standardised
contracts. This will make it possible to ensure that information relating to
all European transactions on derivative products is stored in a trade repository
accessible to all the supervisory authorities concerned. By ensuring that these
transactions are transparent, it will be possible to clearly define the role of
entities in the shadow banking system. Within the framework of the implementation
and future reviews of the Regulation, the Commission will assess the coverage
of the entities belonging to the shadow banking system and determine whether
supplementary initiatives are necessary to ensure that these entities are not
exempt from the obligations regarding compensation and transparency imposed through
the central repositories. In addition, the short selling regulation[22] addressed some of these
concerns by increasing transparency for credit default swap positions and
banning uncovered sovereign credit default swaps. ·
Strengthened securitisation arrangements Securitisation is a financing method that
is important for the effective financing of the economy. However, it has also
been used for significant transfers of credit risk from the traditional banking
system without sufficient safeguards. Requirements similar to those set out in
CRD II are laid down for insurance companies (Solvency II), alternative
investment fund managers (AIFMD) and undertakings for collective investment in
transferable securities (UCITS). The European regulatory framework is in
line with the recommendations issued on 16 November 2012 by the International
Organization of Securities Commissions (IOSCO)[23].
The Commission will continue to pay close attention to these principles in
order to guarantee equal treatment and a good understanding of the risks at international
level. Strengthening the securitisation framework also involves taking robust
measures in terms of transparency. The Commission welcomes any initiatives
aimed at increasing transparency and reinforcing the standardisation of
disclosure. Initiatives led by central banks on collateral[24] and by industry, such as the
implementation of labelling[25]
will allow supervisors to better monitor risks and make it possible for
investors to analyse the risks in greater depth. This should contribute to
create more beneficial conditions for the revival of this market. ·
An enhanced framework for rating agencies Credit rating agencies play an important
role in the shadow banking chain. Rating actions have a direct impact on the
actions of investors, borrowers, issuers and governments. The financial
crisis has highlighted the importance of the assessments made by rating
agencies especially in the decision-making process of investors and how these
facilitated the over-extension of credit and pro-cyclical reactions in many
cases also in the shadow banking sector by facilitating creation of excessive
leverage. The EU has adopted three regulations[26]
with a view to providing a clearer framework for these agencies. This new
framework will reduce overreliance on external ratings, improve the quality of
ratings and increase accountability of credit rating agencies. The third
Regulation (CRA3) which entered into force on 20 June 2013 will help to limit
conflicts of interest by making the agencies accountable and will also reduce
excessive and automatic dependence on these ratings. Those measures in conjunction will help making the
shadow banking system healthier and more resilient. 3. Additional measures
providing a framework for the risks associated with shadow banking Five priority areas can be identified:
increasing transparency in shadow banking, providing an enhanced framework for
funds, particularly money market funds, developing securities law to limit the
risks associated with securities financing transactions, strengthening
prudential arrangements in the banking sector and improving the way in which
supervision of shadow banking is organised. 3.1. Increased transparency In order to be able to monitor risks in an
effective manner and intervene when necessary, it is essential to collect
detailed, reliable and comprehensive data. Authorities must continue in their
efforts to supplement and enhance their statistical tools, such as the granularity
of their flow of funds data. At this stage there are four projects that merit
priority treatment. ·
Supplementing initiatives regarding the
collection and exchange of data There is a need for developing a monitoring
framework for shadow banking risks in the EU. A periodical quantitative
assessment should take place at least annually and should notably identify the
way of bridging information gaps that prevent an adequate and
comprehensive assessment. In this context, the Commission is looking forward to
the contributions of the new ESRB working group and its concrete proposals including
specific risks indicators. At international level, the FSB annual monitoring
exercise offers a good overview of these developments and should be further completed.
In addition the joint FSB - International Monetary Fund (IMF) work on a framework
for the collection and sharing of data on large banks of systemic international
importance (the Data Gaps Initiative) could be usefully enhanced by collecting
data on sectoral interconnectedness which would be useful for monitoring the
risks associated with shadow banking. ·
Developing central repositories for derivatives
within the framework of EMIR and the revision of MiFID EMIR requires registration of all
derivative transactions in central repositories (trade repositories). These reporting requirements will be phased in as of beginning
2014. In terms of monitoring shadow banking, the collection of this data
by trade repositories is a major step forward insofar as it helps to better
identify transfers of risks. These repositories provide immediate access to
detailed information on the interconnectedness of the different actors. For
example, they make it possible for supervisors to monitor who is buying or
selling protection on certain markets (credit derivatives, rate and equity
derivatives). If entities belonging to shadow banking, like hedge funds, are
dominant or bear significant risks, they could be identified by supervisors. The revision of the Markets in Financial
Instruments Directive (MiFID)[27]
will also make it possible to increase the transparency of bonds, structured
products, derivative instruments and emission allowances. This proposal also
extends the scope of the directive to include activities such as high-frequency
trading. By making these activities conditional upon approval being granted,
the proposal will allow the authorities to identify and monitor the risks posed
by high-frequency traders to the markets more easily, even if these traders
belong to the shadow banking system. ·
Implementing the Legal Entity Identifier (LEI) At the request of the G20, the FSB has
established a global governance body - the LEI Regulatory Oversight Committee –
in order to develop and manage a new standard ensuring a unique identifier for
each legal entity that is party to a financial transaction. The LEI will help
supervisory authorities to monitor all financial actors, irrespective of
whether they are regulated, and their financial transactions, on a cross-border
basis. In particular, it will make it possible to identify risk concentration
in the financial system, simplify reporting systems and improve the quality of
data and risk management by financial operators. The LEI will have an impact on
shadow banking because it will make it possible to collect much more
information on the entities that carry out financial transactions. The LEI Regulatory Oversight Committee held
its first two plenary meetings in 2013. With the backing of the FSB, it will gradually
establish the structure responsible for managing the standard, which will be
based on a central unit and on a network of local operators around the world. The
LEI will initially be used for the reporting of derivative products in Europe
and the United States. Its use will then gradually extend into other areas, such
as the implementation of regulation related to banks, hedge funds, credit
rating agencies and financial markets more widely. Three issues should be highlighted in this
regard. First, the Commission encourages the establishment in Europe of local
operating units to assign identifiers to European companies. Secondly, it will
pay particular attention to the transitional stage preceding the implementation
of the definitive identifier, in order, to ensure that transitional identifiers
are globally coherent and recognised as such by the LEI Committee. In this respect
reporting on derivatives should, in each jurisdiction, draw on all of the
identifiers recognised by the Committee. Finally, the Commission will ensure an
appropriate balance between public and private actors in the project, especially
in the context of the creation of the central operating unit that will serve as
the pivot for the system. The Commission will consider the
possibility of preparing a legislative proposal, which would make it possible
to transpose the obligation to use the LEI into the European legal framework. ·
The need to increase transparency of securities
financing transactions The European Systemic Risk Board (ESRB) and
the FSB analysis have shed light on the lack of reliable and in-depth data on
repurchase agreements and securities lending transactions. This data is essential
to observe the risks associated with interconnectedness, excessive leverage and
pro-cyclical behaviours. It will permit the identification of risk factors such
as excessive recourse to short-term funding to finance long-term assets, high
dependence on certain types of collateral and shortcomings in assessing them.
These gaps are a concern, particularly in view of the opacity of collateral
chains which increases the risk of contagion. While actively contributing to
international discussions on this issue, the Commission is closely following
the current ECB initiative to establish a central repository to collect
detailed data on repurchase transactions in the EU in real time. This work will
(i) identify the data necessary for monitoring these transactions and (ii)
analyse the data already available, particularly in infrastructure. The ECB
recently reiterated the need for a reporting framework at EU level[28], while the ESRB has concluded
that setting up a central repository at European level would be the best way to
collect data on securities financing transactions[29]. The Commission will pay specific
attention to this work within the framework of the FSB recommendations. In the
light of these developments, it will assess whether transparency at EU level
has improved, while reserving the right to propose any appropriate measures to
remedy the situation. 3.2. An enhanced framework for
certain investment funds ·
Specific legislative measures to provide a
better framework for money market funds The financial crisis has shown that money
market funds, which were seen as relatively stable investment vehicles, could
pose a systemic risk. These funds are a useful tool for investors because they
offer characteristics similar to those of bank deposits: instant access to
liquidity and stability of value. However, money market funds are nonetheless investment
funds, subject to market risk. During periods of high market turbulence, it is
difficult for these funds to maintain liquidity and stability, particularly in
the face of investor runs. Consequently they could pose a serious risk of
contagion. Following the consultation organised in
2012 on remodelling the asset management sector[30] and with a view to responding
to the European Parliament resolution[31],
the Commission published together with the present Communication a proposal for
a Regulation that will apply to all European money market funds without
exception <http://ec.europa.eu/internal_market/investment/money-market-funds/index_en.htm>.
These proposals take into account the work carried out at both international
IOSCO and FSB) and at European level (ESRB recommendations[32] and ESMA guidelines. They will
strengthen, in particular, the quality and liquidity of the asset portfolios
held by these funds and will establish, for some of these funds, capital
buffers in order to cover the gaps in valuation associated with fluctuations in
their asset value. ·
Strengthening the UCITS framework In the context of the general review of the
UCITS Directive (a public consultation was carried out in 2012), the Commission
will tackle other problems associated with asset management. A global
assessment of the framework in which certain funds[33] can operate will be carried
out, including the way in which certain investment techniques and strategies
are used. As a key feature, the review will examine how
investment funds use securities financing transactions. Funds will have to
ensure that the use of this type of transaction does not impair their
liquidity. These transactions generally go hand in hand with collateral
exchange covering the funds against counterparty risk. The eligibility criteria
and diversification of assets posted as collateral will be reviewed in order to
ensure that potential losses are covered effectively and immediately in the
event of default of a counterparty. Particular attention will be given to funds
connected by this type of transaction to the banking system. 3.3. Reducing the risks
associated with securities financing transactions Beyond the fund management industry, securities
financing transactions – mainly repurchase agreements or securities lending
transactions – played a central role in the excessive level of indebtedness in
the financial sector. In addition since the financial crisis first began,
financial intermediaries have frequently been forced to use security
(collateral) to obtain financing in the markets. This collateral covers lenders
against counterparty risk but can also be re-used by lenders In the EU, this collateral usually takes
the form of securities, which can be re-lent to other financial intermediaries
in order to guarantee or secure new credit transactions. If this collateral is
lodged in cash, it can be re-invested. The reuse or rehypothecation of
securities generates dynamic collateral chains in which the same security is
lent several times, often involving actors from the shadow banking system. This
mechanism can contribute to an increase in leverage and strengthen the
pro-cyclical nature of the financial system, which then becomes vulnerable to
bank runs and sudden deleveraging. Furthermore, the lack of transparency of
these markets makes it difficult to identify property rights (who owns what?)
and to monitor risk concentration as well as identify counterparties (who is
exposed to who?). The recent cases in which major financial intermediaries have
filed for bankruptcy (e.g. Lehman Brothers) are a testament to these problems.
They are sometimes accentuated by the interconnectedness of financial
institutions and the collateral transformation strategies implemented by
certain financial actors. Therefore the default of a large financial institution
could also destabilise the securities markets. In-depth work has been carried out to better
understand and learn from these events. In order to resolve these problems, the
Commission is considering a legislative proposal regarding securities law. 3.4. Strengthening the prudential
banking framework in order to limit contagion and arbitrage risks The risks posed by shadow banking to
regulated banks could be addressed in two main ways: ·
Tightening the prudential rules applied to banks
in their operations with unregulated financial entities in order to reduce
contagion risks The Capital Requirements Regulation (CRR)[34] and Directive (CRD IV)[35], which will apply from 1
January 2014, will tighten the solvency rules applied to banks, in particular
regarding capital requirements for holdings in financial entities, including
unregulated entities. Furthermore, this prudential reform will
make it obligatory for banks to cover with additional own funds the
counterparty risk generated by certain OTC derivative transactions with shadow
banking counterparties. This reform provides for the imposition of an
additional capital requirement to cover potential losses resulting from changes
in the market value of these derivatives where the solvency of the counterparty
to these derivatives deteriorates if and only if the counterparty is not
exempted from this rule (credit value adjustments or CVA). A number of shadow
banking entities are important counterparties in these derivative transactions.
Banking institutions should therefore be encouraged to conclude fewer
transactions with unregulated entities. Furthermore, this legislation provides for
new liquidity rules[36]
which should result in an increase in the maturity of banks' financial liabilities
and should reduce recourse to short-term financing, often granted by entities such
as money market funds. However, as these measures will affect all
financial counterparties of banks equally, whether or not these counterparties
are regulated, two new specific measures have been introduced to reduce the
risks that shadow banking poses to banks: –
Starting from 2014 banks will be required to
report to their supervisors their main exposures to unregulated entities as
well as exposures arising from repurchase agreements and securities lending
transactions; –
By the end of 2014 the European Banking
Authority (EBA) is requested to prepare guidelines to limit banks’ exposure to
unregulated financial counterparties, while the European Commission is required
to determine, by the end of 2015, whether it is appropriate to establish such
limits in the EU legislation after considering the work carried out at both
European and international levels. ·
Thinking about a possible extension of the scope
of application of prudential rules in order to reduce arbitrage risks By extending the scope, it would be
possible to respond to the concerns notably expressed in the Parliament's
initiative report which suggests the application of prudential rules to entities
performing activities similar to those of banks without a banking licence. It is not possible to discuss shadow
banking without considering the scope of application of the EU banking
prudential rules. According to EU legislation,[37]
any “undertaking whose business is to receive deposits or other repayable funds
from the public and to grant credit for its own account” is required to
meet banking prudential requirements. However, the concept of "repayable
funds from the public", and even the concepts of credit and deposits can
be interpreted in different ways, meaning that financial entities performing similar
activities may be qualified as credit institutions in some Member States but not
in others. As a result these entities may not be subject to the same rules
within the European Union. A precise assessment of the way in which the
definition of credit institutions is applied and the way in which credit
institutions are identified in the 28 Member States is therefore necessary. If
the results of this assessment show specific problems, the Commission could
clarify, by means of a delegated act, the definition of a credit institution
for the purposes of prudential banking regulation on the basis of Article 456
of the CRR. The entry into force of the CRR – which is
a regulation as opposed to the previous situation where the definition of
credit institutions was contained in a Directive - means that only financial
entities fulfilling both deposits-taking and credit activities will be
qualified as “credit institutions” starting from 2014. Until now Member States have been allowed to define a credit institution more
broadly when transposing the Directive 2006/48/EC. For instance, in some Member
States, non-deposit taking credit providers, such as finance companies, may be
qualified as credit institutions and hence be required to fulfill EU banking
prudential rules. Some Member States might take the
decision to continue to apply the banking prudential requirements or adjusted
prudential requirements to these credit providers. Others might decide not to
apply specific rules. This may result in different prudential treatments across
Member State as regards entities which do not fulfil the requirements of the
definition of a credit institution in CRR. Including in this assessment all financial
entities performing activities similar to those performed by banks without
being classified as credit institutions will help to assess the differences in national
prudential treatments[38].
EBA will be requested to assess the size of
those financial entities falling outside the scope of European banking
prudential regulation. As this task will require a horizontal assessment of the
financial sector, EBA will also be able to draw on the work carried out by
other European supervisory authorities. Such an initiative would also make it
possible to strengthen the European macro-prudential supervision framework that
makes it obligatory for banks to maintain a countercyclical capital buffer at
the request of supervisory authorities when they deem the volume of lending to
be excessive. An instrument of this nature can be fully effective only if it
takes into account all financial entities that grant credits and not just credit
institutions. The Commission will also consider forthcoming
FSB recommendations on the other entities from the shadow banking system which
are not currently subject to a suitable supervision framework and will propose,
if necessary, legislative measures to remedy this. 3.5. Greater supervision of the
shadow banking sector Shadow banking is by its very nature
multifaceted and dynamic. It adapts to changes in both markets and regulations.
The Commission therefore requests national and European authorities to maintain
constant vigilance and be equipped with the supervision tools available for
this system. The diffuse nature of shadow banking makes
performing such supervision all the more complex. With regard to the
competencies currently attributed to the supervisory authorities,
responsibility for supervision has yet to be clearly defined or lacks depth. In
the light of this, it is essential that both national and European authorities
take measures to ensure the establishment of a suitable and comprehensive
monitoring system. At national level, each Member State must ensure that the risks inherent in shadow banking are identified and
monitored. This task is often performed by the bodies in charge of the
macro-prudential supervision of the financial sector, if such bodies exist, in
collaboration with central banks and sectoral supervisory authorities. The
Commission will pay close attention to the quality of this monitoring and to
whether there is close cooperation between the national authorities. As the
shadow banking system is global, it must be possible to perform risk analysis
on a cross-border basis. At European level, work is under way
regarding the assessment, identification and monitoring of entities and risks
posed by shadow banking. Preliminary work has been carried out within the ESRB
and the European supervisory authorities (EBA, EIOPA, ESMA). All of this work
must be stepped up and coordinated, making sure that no source of systemic risk
goes unnoticed by supervisors. It must reduce arbitrage opportunities among
financial sectors and cross-border possibilities of circumventing prudential rules.
This aspect, as well as the possible need
to clarify the institutional role of each authority, will be notably tackled
within the framework of the review of the European System of Financial
Supervisors (ESFS), to be performed by the Commission in 2013. This assessment
will take into account, in particular, the existence of effective procedures to
collect and exchange information on shadow banking. The discussion will also
take account of the developments associated with the implementation of the
single supervisory mechanism. 3.6. Conclusion The shadow banking sector should not be
seen solely in terms of the risks that it poses; it is also essential to
acknowledge the important role that it plays within the financial sector. It
constitutes an alternative financing channel that is essential to the real
economy, particularly at a time when traditional actors in the banking system
are reducing financial support. The actions described in this Communication
are not exhaustive and the Commission will continue to assess whether supplementary
measures are necessary to ensure that a suitable framework is established for
shadow banking. This dynamic and forward-looking approach is necessary in order
to respond to the changes in this system, which is constantly adapting to the
regulatory context. _________________________________ Main
measures in the field of shadow banking[39] || 2009-2012 || 2013 || 2014 and beyond Indirect approach through Banking regulation || · CRD 2 implemented in 2010 · CRD 3 implemented in 2011 · Amendment to IFRS 7 in 2011 (incl. certain securitisation risks) || · EU consultation on banking structural reform (Liikanen report follow-up) || · COM proposal on structural reform || · CRD 4 implementation as of 01/01/2014 · Implementation of amendments to IFRS 10, 11, 12 (consolidation requirements /disclosure) Specific initiatives in the banking sector / Shadow Banking || || || · EBA assessment on the scope of banking prudential regulation to start (final report in 2014) || · EBA report on limits to unregulated counterparties exposures Indirect approach/ Insurance sector || || · EIOPA Reports for Omnibus II trilogue || · Omnibus II trilogues to be concluded || · Delegated Acts for Solvency II (including capital requirements and risk management requirements) Asset management sector || · IOSCO/FSB/ESRB work on policy recommendations for Money Market Funds || · AIFMD implementation (transposition deadline 22/07) || · Money Market Funds regulation proposal (04/09) || · UCITS review including investment techniques and strategies of the funds Risk transfers framework || · EMIR into force since 2012 || · Technical standards adopted (March); || · Technical standards on contracts subject to mandatory clearing obligation to be adopted (Q2) and to enter into force (Q3) Reducing risks associated with securities financing transactions || || · FSB work on policy recommendations related to repo and securities lending transactions || · Securities Law proposal including elements on property rights and transparency. Enhancing Transparency of Shadow Banking || || · Establishment of the LEI Regulatory Oversight Committee · Shortselling regulation implementation (increased transparency for CDS and banning uncovered sovereign CDS) · MIFID revision / increase the scope of transparency || · Entry into force of the reporting requirements for derivatives transactions to trade repo (EMIR) (Q1) · Monitoring framework to be develop by authorities (eg. ESRB working group), · Securities law proposals /Specific actions for securities financing transactions (eg. ECB initiative on a trade repo) · Legal identifier (LEI) implementation phase EU Supervisory framework || || · EFSF review by the Commission || · See if further actions are needed to enhanced shadow banking oversight in the EU Rating agencies || · CRA 1 into force in 2009 · CRA 2 into force in 2011 || · CRA 3 into force since 20 June 2013 (addressing notably conflict of interests, excessive reliance on ratings) || Resolution tools for non-banks || · COM public Consultation on non-bank resolution || · Internal assessment / works at international level (FSB on resolution and CPSS-IOSCO on recovery of FMIs) || · COM initiative (legislative proposal on recovery and resolution of CCPs and Communication on the policy orientation in relation to other non-financial institutions) [1] See http://ec.europa.eu/internal_market/bank/docs/shadow/green-paper_en.pdf [2] See G20 communiqué following the Cannes summit,
November 2011. [3] See G20 communiqué following the London summit, 2
April 2009. [4] All of the actions proposed by the Commission in this
document are consistent and compatible with the current multiannual financial
framework (2007-2013) and the proposal for the upcoming period (2014-2020). [5] Directive 2011/61/EU of the European Parliament and
the Council on Alternative Investment Fund Managers (AIFMD) (OJ L 174
1.7.2011 p.1). [6] For instance, the provisions related to
securitisation exposures in the revised Capital Requirements as included in
Regulation (EU) 575/2013 and Directive 2013/36/EU. [7] See FSB report 'Shadow Banking System, Scoping the
Issues' of 12 April 2011. Five working groups were set up to work on i) the
interactions between the shadow banking system and the banks, ii) the reduction
of risks associated with money market funds, iii) the risks posed by
"other" entities of the shadow banking system, iv) the incentive
framework and transparency of securitisation transactions and v) the risks
posed by securities financing transactions. [8] These may include ad hoc entities such as
securitisation vehicles or conduits, money market funds, investment funds that
provide credit or are leveraged, such as certain hedge funds or private equity
funds and financial entities that provide credit or credit guarantees, which
are not regulated like banks or certain insurance or reinsurance undertakings
that issue or guarantee credit products. [9] See http://www.financialstabilityboard.org/publications/r_121128.pdf [10] The figures are shown in USD in the FSB study. This
gives a total of USD 67 000 billion,
USD 23 000 billion of which are in the United States, USD 22 000 billion in the eurozone and USD 9 000 billion in the United Kingdom. [11] To allow international comparisons, FSB data is used. Studies
have also been carried out by the Commission, the European Central Bank, ESMA, and
the ESRB. These studies adopt different methodologies, definitions and data
sources which may lead to substantial differences in the estimations. [12] See http://ec.europa.eu/internal_market/consultations/docs/2012/shadow/replies-summary_en.pdf. [13] See http://www.europarl.europa.eu/oeil/popups/ficheprocedure.do?lang=en&reference=2012/2115(INI) [14] Directive 2009/111/EC of the European Parliament and of
the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and
2007/64/EC as regards banks affiliated to central institutions, certain own
funds items, large exposures, supervisory arrangements, and crisis management
(OJ L 302 17.11.2009 p.97) [15] Directive 2010/76/EU of the European Parliament and of
the Council of 24 November 2010 amending Directives 2006/48/EC and 2006/49/EC
as regards capital requirements for the trading book and for
re-securitisations, and the supervisory review of remuneration policies (OJ L
302 14.12.2010 p.3) [16] The Commission is also following the work carried out
by the Basel Committee on this subject and its proposed amendments to the
current arrangements. [17] See http://ec.europa.eu/internal_market/insurance/solvency/
[18] The Commission services will take into account in
particular the principles of the Joint Forum which will be finalised by the end
of 2013. http://www.bis.org/press/p130211.htm. [19] Directive 2011/61/EU of the
European Parliament and the Council on Alternative Investment Fund Managers
(AIFMD) (OJ L 174 1.7.2011 p.1). [20] By the end of the third quarter of 2012 the total
assets under management by these alternative funds amounted to around EUR
2 500 billion (source: EFAMA). [21] Regulation (EU) No 648/2012 of the European Parliament and of the
Council of 4 July 2012 on OTC derivatives, central counterparties and trade
repositories (OJ L 201 27.7.2012 p. 1) [22] Regulation (EU) No 236/2012 of the European Parliament
and of the Council of 14 March 2012 on short selling
and certain aspects of credit default swaps (OJ L 86 24.3.2012 p. 1) [23] See
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD394.pdf. [24] See, for example, the initiatives taken by the
Eurosystem and by the Bank of England. [25] The two examples are the PCS (Prime Collateralised
Securities) Label for the asset-backed securities market and the European
Covered Bond Council (ECBC) Label for the covered bond market. [26] See http://ec.europa.eu/internal_market/rating-agencies/index_en.htm
referring to the most recent Regulation (EU) No 462/2013 of the
European Parliament and of the Council of 21 May 2013 amending Regulation (EC)
No 1060/2009 on credit rating agencies Text with EEA relevance (OJ L 146,
31.5.2013, p. 1–33) and Directive 2013/14/EC of the European
Parliament and of the Council of 21 May 2013 amending Directive 2003/41/EC on
the activities and supervision of institutions for occupational retirement
provision, Directive 2009/65/EC on the coordination of laws, regulations and
administrative provisions relating to undertakings for collective investment in
transferable securities (UCITS) and Directive 2011/61/EU on Alternative
Investment Funds Managers in respect of over-reliance on credit ratings (OJ L
145, 31.5.2013, p. 1–3) [27] See http://ec.europa.eu/internal_market/securities/isd/mifid_en.htm
[28] See http://www.ecb.europa.eu/pub/pdf/mobu/mb201302en.pdf#page=90 [29] http://www.esrb.europa.eu/pub/pdf/occasional/20130318_occasional_paper.pdf?e85401cf104ef718cfe83797b55c87f6 [30] http://ec.europa.eu/internal_market/consultations/2012/ucits_en.htm. [31] See http://www.europarl.europa.eu/oeil/popups/ficheprocedure.do?lang=en&reference=2012/2115(INI) [32] http://www.esrb.europa.eu/pub/pdf/recommendations/2012/ESRB_2011_1.en.pdf?5c66771e20fc39810648296a2c6102d9 [33] The approach will be wider than the exchange traded
funds (ETF) category, [34] Regulation (EU) No 575/2013 of the European Parliament
and of the Council of 26 June 2013 on prudential requirements for credit
institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ
L 176 27.6.2013 p.1) [35] Directive 2013/36/EU of the European Parliament and of
the Council of 26 June 2013 on access to the activity of credit institutions
and the prudential supervision of credit institutions and investment firms,
amending Directive 2002/87/EC and repealing Directives 2006/48/EC and
2006/49/EC (OJ L 176 27.6.2013 p.338) [36] These new rules will be finalised once the impact
studies will have been completed. [37] Article 4(1) of Directive 2006/48/EC of the European
Parliament and the Council of 14 June 2006 relating to the taking up and
pursuit of the business of credit institutions (recast) (OJ L 177 30.6.2006
p.1) and point (1) of Article 4(1) of Regulation (EU) No 575/2013 of the
European Parliament and the Council of 26 June 2013 on prudential requirements
for credit institutions and investment firms and amending Regulation (EU)
648/2012 (OJ L 176 27.6.2013 p.1). [38] For example, this is the case for consumer credit,
factoring and even leasing activities which are performed without a banking
licence in certain Member States. [39] All dates are indicative.