EU executive cautious on shadow banking controls

Tue Dec 10, 2013 10:38am EST
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By Huw Jones

LONDON (Reuters) - The European Union's executive has ruled out hasty curbs on "shadow banking", or simplistic trading restrictions on mainstream lenders, in case it ends up crimping finance for the economy.

Testimony to Britain's parliament from Patrick Pearson, a senior official at the bloc's European Commission, signaled the latest softening in tone among regulators, fearful of unintended consequences of new rules for the flow of credit to companies.

Shadow banking refers to the opaque $70 trillion sector that includes money market funds, securities lending, repurchase agreements and other forms of short-term borrowing and lending outside the main banks, which helps grease the economy.

Regulators worry that as mainstream lenders are more tightly regulated, risky activities will shift to the shadow banking sector. They are therefore looking at what steps should be taken to contain risks.

Pearson said there was already evidence that as banks focus on building up their capital buffers, hedge funds and other unregulated firms were offering liquidity to markets.

The European Commission has the sole right to propose EU laws and had aired possible curbs, but Pearson downplayed any imminent proposals to ban or restrict shadow banking activities.

"The priority at this point is transparency, transparency, transparency," he told a House of Lords economics committee on Tuesday. "Regulators are quite aware not to squeeze out an important source of liquidity."

The emphasis will be on collecting data to find out what was going on before jumping to regulatory conclusions, he said.   Continued...

A woman walks along the south bank of the Thames opposite the Houses of Parliament on a foggy morning in London September 24, 2013. REUTERS/Andrew Winning