EU's plans for growth to bring shadow banking in from the cold

Mon Mar 24, 2014 2:12am EDT
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By Huw Jones

LONDON (Reuters) - European Commission proposals due to be published on Thursday on how to fund long-term investments to boost Europe's economies brings the start of a rehabilitation for the image of "shadow banking", the largely unregulated market-based provision of credit which lay at the heart of the financial crisis.

The EC plans envisage engineering a fundamental shift in how the continent raises money for investment in infrastructure like roads and technology while at the same time moving away from an over-reliance on banks for fuelling growth in the economy.

A core element involves reviving securitization or the bundling of loans into interest-bearing bonds, a market which was fatally wounded by its central role in the financial crisis seven years ago when bonds which packaged up subprime U.S. home loans became untradeable.

Now the market for asset backed securities, currently has 650-700 billion euros worth of bonds in circulation, half its pre-crisis size.

This shrinkage, coupled with banks being wary of lending as they rebuild their capital buffers, makes it harder than ever to seed economic growth in Europe.

In the immediate aftermath of the financial crisis regulators called for a tough crackdown on the $71 trillion global shadow banking sector that also includes debt market repurchase agreements, securities lending, money market investment funds and some hedge funds.

But with the worst of the crisis now over, government attention has turned to growth and with it the regulatory mood music has also changed.

Policymakers are thinking twice about imposing new rules on one of the few sources of funding that can plug a gap left by retreating banks and the EU plans are a major milestone in this change of tack.   Continued...

European flags are hung outside the European Commission headquarters in Brussels January 22, 2014. REUTERS/Yves Herman