Who's afraid of the shadows? – EU moves to curb emerging threats from shadow banking

Opinions expressed by the author are his own and in no way reflect that of his employer.

Introduction

‘Chasing shadows’ has a quixotic connotation in English and regulators and policy makers are only all too aware of the dangers of doing exactly that when forming crucial policy measures to rein in on future instability stemming from the shadow banking system. There are many lessons to be drawn from the financial crisis, foremost (according to the current orthodoxy) is the apparent scale and role of the shadow banking system in the run-up to and during the height of the crisis. This lesson is not lost among the EU’s policymakers and, as a consequence, curbing the emerging threats from the ‘shadow banking system’ is the centerpiece of the EU’s recent focus on regulating shadow banks to ensure the consistency of the overall regulatory reform package. Michael Barnier, EU Internal Market and Services Commissioner, underscored the significance of preventing financial activities and entities circumventing existing and future rules as well as mitigating new sources of risk to accumulate in the financial system.[1] He said that ‘we must shed light on all parts of the financial sector’[2], stressing the paramount need to illuminate the dark fringes of the financial system; whilst Adair Turner, FSA Chairman, stressed that the 2007-2008 financial crisis is not simply one of banks themselves but also the result of a new phenomenon – shadow banking.[3]