In a statement released this morning, the EC set out what it described as a “roadmap for tackling the risks inherent in shadow banking” – a sector which the Financial Stability Board estimated in 2011 to be around €51trn in size.
Shadow banking is essentially the system of credit provided to companies outside the normal regulated banking sector and includes money market funds, which the EC acknowledge are an important source of short-term financing for financial institutions, corporate and governments.
In its statement the EC said in Europe, around 22% of short term debt securities issued by governments and the corporate sector are held by money market funds. The funds also hold around 38% of the debt issued by the banking sector.
It is because of this “interconnectedness” with the banking sector and with corporate and government finance, said the EC, that it is important to ensure it is stable.
The EC said: “Since the beginning of the financial crisis back in 2007, the European Commission has undertaken a comprehensive reform of the financial services sector in Europe.
“The aim is to establish a solid and stable financial sector – essential for the real economy – by addressing the shortcomings and weaknesses highlighted by the crisis. But risks must not be allowed to accumulate in the shadow banking sector, in part because new banking rules could be pushing certain banking activities towards this less highly regulated shadow banking sector.”
Under the proposals revealed today by Michel Barnier, the EU commissioner responsible for financial regulation, money market funds should be held to a mandatory 3% capital cushion, should be limited to investing in highly liquid assets with maturities as short as one day and to have exposure to each issuer capped at 5%.