Vol 12 (2015) - Issue 4

Article preview

Policy, or Practicality? An Analysis of Shadow Banking Reforms in the EU – Part One

Introduction
Post-financial crisis, the concept of 'shadow banking' and its associated risks have come under intense regulatory and public scrutiny. As a result of the 2008 financial crisis, the European Commission (EC) has embarked on what may arguably be considered the greatest overhaul of financial services ever seen in Europe. While public perception of 'shadow banking' remains relatively new, the term has been on the regulators’ agenda since G20 leaders first called upon member countries to 'strengthen regulation and oversight of shadow banking' at the 2010 Seoul Summit. Figures from the Financial Stability Board’s (FSB) latest annual global monitoring report indicate that, by conservative estimates, non-bank financial intermediation grew by USD 5 trillion to reach a total of USD 71 trillion in 2012. Growth of the shadow banking sector was just as apparent cross-jurisdictionally: although advanced economies remained the ones with the largest non-bank financial systems in absolute terms, emerging market jurisdictions showed the most rapid asset growth. Given the scope, scale, and the recent spate of regulatory reforms that has since been spurned, it is clear that there has never been a more pertinent time to examine new regulatory attempts to curtail the risks associated with this previously unregulated sector.
Part One of this article will first attempt to provide the reader with context to the term 'shadow banking', fleshing out its scope, definition and the difficulties this might pose whilst also examining its historical background alongside the various factors that have contributed to its growth. It will also set out the current regulatory landscape, focusing in particular on the European Union (EU). More specifically, it will examine the latest work of the EC, including its recently issued regulatory 'roadmap' for reform (via a 2013 Communication), as well as two important proposals pertaining to the regulation of Money Market Funds (MMFs) and securities financing transactions (SFTs).
Part Two will then build upon the foundations set in Part One by attempting a critique of previously outlined reforms. By questioning the concept of financial 'risk' and the conventional assumptions surrounding said 'shadow banking' institutions, it will argue that, by and large, current efforts at regulation have missed the mark on both the micro and macro scale, and will call for regulators to accord greater weight to the benefits of the sector in order to avoid an overly broad, knee-jerk reaction to a crisis.