Barnier to target shadow banking

Commissioner delays plans for money-market funds until after the summer break.

The European Commission is preparing legislation on money-market funds as part of wider plans to clamp down on financial transactions outside the normal regulated banking sector. Michel Barnier, the European commissioner for the internal market, was scheduled to put forward the package of  ‘shadow-banking’ proposals before the summer break, but will now delay an announcement  until September. 

Barnier has identified the regulation of money-market funds as a priority in his attempts to reduce the risks involved in shadow banking – traditionally a lightly regulated sector that also includes hedge funds, re-purchase agreements and securitisations.

Money-market funds are used by investors and large companies to keep cash for a short period of time at low risk, and have traditionally been seen as a safe place for investments. However, since the start of the financial crisis they have come under strain. There were runs on funds – which hold about €1 trillion in the European Union – in the wake of the collapse of Lehman Brothers in 2008.

Regulators say runs could trigger contagion and further shocks throughout the financial system. The International Monetary Fund and the Financial Stability Board – the international body set up by the G20 in 2009 to monitor the global financial system – have both urged regulators to tackle money-market funds.

The Commission is expected to propose that certain types of funds – namely those that maintain a fixed share price – should keep a cash buffer to protect them from runs and financial shocks, similar to EU requirements on banks to keep capital and liquidity.

The way ahead

In addition to the draft legislation on money-market funds, Barnier will announce his next steps for regulating the rest of the shadow-banking industry, which includes activities such as securitisation, securities lending and repurchase transactions (know as ‘repo’)

Shadow banking in the EU is worth more than €50 trillion, equivalent to about 30% of the total financial system.

Financial market participants are nervous about the impact of any new rules. “The risk is that we end up with double regulation and over-regulation or regulation that is inconsistent,” said Sidika Ulker, a director at the Association for Financial Markets in Europe.

“What is crucial is to see whether and how the European Commission incorporates different elements of shadow banking into legislation that has already been proposed.”

Defenders of shadow banking have argued that it had nothing to do with the financial crisis. They have warned that stricter regulation could impede the functioning of the financial system.

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