The murky world of shadow banking is the next target of financial regulators.
Shadow banking is carried out by financial organisations that are not banks, but offer credit on similar terms but are not subject to any of the rules and stress-testing that banks must comply with.
According to the European Union, these institutions have 51 trillion euros under their control, which is equivalent to almost a third of global financial assets.
The EU estimates that around 24 trillion euros of these funds are tied to the UK and the Eurozone single currency countries – with about 7 billion euros attached to the British economies.
The worry is this huge amount of cash washing around in the financial system is out of control of the regulators and could destabilise the work of governments and regulators to steady their economies following the banking crisis.
Money market funds
As a step towards regulating the shadow banking system, the European Commission is proposing new rules to govern money market funds.
The funds provide short-term funding for other financial institutions, businesses and governments.
In Europe, almost a quarter of short-term debt securities issued by governments or the corporate sector are held by money market funds.
The funds also hold nearly 40% of short-term debt issued by banks.
Because of this underlying network of links between banks, companies and governments with money market funds, regulators want to make sure any problems in the sector do not undermine the slow economic recovery in the EU.
Tighter controls
The new proposals will call for tighter control of money market funds, bringing their governance more into line with that banks face.
Internal Market and Services Commissioner Michel Barnier said: “The European commission has worked hard to establish a comprehensive regulatory program for banks and markets.
“Now, the shadow banking system needs bringing under control in the same way because of the financial risks it poses to banks, business and governments by working outside of the regulatory network.
“At the same time, we understand the important role the shadow banking system plays in Europe and we want to strengthen rather than weaken the money market funds.”
The EU wants to bring money market funds under control as soon as possible, as the markets are global and any financial crisis outside Europe could affect debts owed by banks, business and governments within Europe.
