Shadow banking - Commission is chasing the wrong quarry

04-Sep-2013 @ 14:0

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Anthea McIntyre Anthea McIntyre

Anthea McIntyre Anthea McIntyre

As the European Commission today announced plans to tackle the perceived problem of so-called shadow banking, Conservative MEP Syed Kamall said officials were concentrating their efforts in entirely the wrong area.

Dr Kamall said the EU needed to concentrate on the root causes of Europe's economic crisis instead of constantly looking to create more regulation.

The London MEP, who is Conservative spokesman on economic and monetary affairs in the European Parliament, said: "Across vast areas of Europe the economy remains stuck in the mire, unemployment is rampant and the currency crisis still not fixed. Yet nothing announced today will contribute a jot to turning that dire picture around. You have to wonder where the Commission gets its sense of priority."

The official Commission statement expressed concern that new banking rules were pushing certain banking activities towards less highly regulated sectors. That, it said, was why commissioners had "adopted a roadmap to tackle the risks posed by the shadow banking sector". The communication summarised work undertaken so far and set out possible further actions – including new rules for money market funds (MMFs) intended to create increased liquidity and greater transparency.

However, Dr Kamall observed: "More than five years after the beginning of the financial crisis, banks are still being bailed out with taxpayers’ money. Ever more regulation is being churned out of Brussels and yet some banks are still deemed as too big to fail and the eurozone crisis is not over.

"We should be wary of the unintended consequences. For example, the capital requirements directive which was supposed to build banks’ capital buffers, relies on banks’ own internal models to determine how strong their balance sheets are, while the European market infrastructure regulation (Emir) on derivatives, has simply created new centres of systemic risk in the form of central clearing houses.

"MMFs are already heavily regulated by the undertakings for collective investment in transferable securities (UCITS) directive in the EU. MMFs are used by retail investors, corporate treasuries and pension funds as homes for extra cash that they would prefer to invest rather than deposit in a bank. The funds themselves, managed by big asset managers just like any other UCITS fund, tend to invest their money in government and corporate debt. In Europe, around €1 trillion are currently invested in MMFs.

"Critics of these funds point out that they experienced bank-like runs during the crisis, which required massive bailouts and guarantees from the state. On this basis, regulators in both the US and the EU have proposed that certain types of money market funds should have bank-style capital requirements. This might seem to make sense, but practitioners argue that such requirements will simply shut down this market, given the tough market conditions and the tight margins involved. Others suggest that by shutting down the MMF sector, the €1 trillion they are currently holding will be forced into Europe’s undercapitalised banks, which many corporates have expressed concern over.

"Instead of seeking ever more areas to regulate, we should ensure that we are focused on tackling the root causes of the crisis - including the state’s implicit guarantee of the financial system’s biggest banks.

"The Commission is sweating over building a mousetrap when there's a tiger on the loose."
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