Annexes to COM(2012)102 - Green paper shadow banking - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2012)102 - Green paper shadow banking. |
|---|---|
| document | COM(2012)102  |
| date | March 19, 2012 |
As regards MMFs and ETFs, these funds may be covered by existing legislation on undertakings for collective investment in transferable securities (UCITS).[11] In addition, ESMA has developed guidelines which entered into force on 1 July 2011.[12] These guidelines include recommendations for these funds to restrict the eligible investments, limit the weighted-average maturity, and to carry out daily net asset value calculations.
Credit Rating Agencies (CRAs) are not leveraged and they do not directly engage in maturity transformation. Nevertheless, they have an important role in the credit intermediation chain since they assign ratings to products and entities. In the EU, CRAs are subject to stringent regulation and supervision by ESMA.[13] Moreover, the Commission has proposed additional legislative measures to strengthen the credit rating process.[14]
Finally, in relation to insurance regulation, Solvency II also addresses a number of shadow banking issues as it provides comprehensive regulation centred on a risk-based and economic approach, along with strong risk management requirements including a "prudent person" principle for investments. In particular, it explicitly covers credit risks in capital requirements; provides for a total balance sheet approach where all entities and exposures are subject to group supervision; and, is as stringent in respect of credit risk as CRD IV. Solvency II also requires Member States to authorise the establishment of an insurance SPV. Detailed rules implementing Solvency II which are currently being considered will include authorisation and ongoing regulatory requirements relating to solvency, governance and reporting as far as insurance SPVs are concerned.
Questions:
k) What are your views on the current measures already taken at the EU level to deal with shadow banking issues?
7. Outstanding Issues
Although the indirect, extended and direct regulatory measures set out above go a long way to addressing shadow banking entities and activities, there is still further progress to make given the evolving nature of the shadow banking system and out understanding of it.
In coordination with the FSB, the standards setting bodies and the relevant EU supervisory and regulatory authorities, the aim of the Commission's current work is to examine existing measures carefully and to propose an appropriate approach to ensure comprehensive supervision of the shadow banking system, coupled with an adequate regulatory framework.
In this context, there are five key areas where the Commission is further investigating options and next steps.
7.1. Banking Regulation
In this area, several issues are being examined with the overarching aim to:
· recapture for prudential purposes any flawed risk transfer towards shadow banking entities;
· examine ways to identify the channels of exposures, limit excessive exposure to shadow banking entities and improve the disclosure requirements of banks towards exposures to such entities; and
· ensure that banking regulation covers all relevant activities.
In particular, consolidation rules for shadow banking entities are being examined to ensure that bank-sponsored entities are appropriately consolidated for prudential purposes and therefore fully subject to the comprehensive Basel III framework. It is also appropriate to study the differences between accounting consolidation and prudential consolidation, as well as the differences between jurisdictions. In this regard, it is worthwhile to assess the impact of the new IFRS on consolidation, in particular in respect of shadow banking entities.
As regards bank exposure to shadow banking entities, there are several issues that need to be investigated further: (i) whether the large exposure regime in the current banking legislation is stringent enough to properly address all shadow banking exposures, individually as well as globally; (ii) how to account effectively for leverage in shadow banking entities such as investment funds, including in particular whether to extend the so-called look-through approach currently being applied by some banks; (iii) whether to apply the CRD II treatment of liquidity lines and credit exposures for securitisation vehicles to all other shadow banking entities; and, (iv) a review of the implementation of the national supervisory treatment for implicit support.
Existing EU banking legislation is limited to deposit-taking institutions that provide credit. It could be considered to enlarge the scope of financial institutions and activities covered by the current legislation. The Commission is currently studying the merits of extending certain provisions of CRD IV to non deposit-taking finance companies not covered by the definition in the Capital Requirements Regulation (CRR).[15] This would also limit the scope for future regulatory arbitrage for providers of credits.
7.2. Asset management regulation issues
The Commission is looking carefully at the evolution of both the ETF and the MMF markets in the context of shadow banking.
As far as ETFs are concerned, the FSB has identified a possible mismatch between liquidity offered to ETF investors and less-liquid underlying assets. The current regulatory debate focuses on possible liquidity disruptions; the quality of collateral provided in cases of securities lending and derivatives (swap) transactions between ETF providers and their counterparties; and, conflicts of interest where counterparties in these transactions belong to the same corporate group. Some of these issues are not confined to ETFs. They arise in every instance where securities owned by an investment fund are lent to other counterparties or where a fund enters into a derivative transaction (e.g. total return swaps) with counterparty.
In addition, ESMA is currently carrying out a review of the UCITS framework in general and in particular as regards the potential application to ETFs, with a view to adopting new guidelines this year. The guidelines will include recommendations regarding the labelling of ETFs, disclosures to investors and use of collateral.
In relation to MMFs, the main concerns identified relate to the risks of runs (i.e. massive simultaneous redemptions by investors). Such runs could seriously affect financial stability. The FSB has identified the possibility of runs stemming mainly from the credit and liquidity risks inherent to the portfolio of an MMF, as well as from the method of valuing MMFs' assets. The risks of runs increase when MMFs value their assets through the amortised cost approach in order to maintain a stable Net Asset Value (NAV), even if the market values of the underlying investments fluctuate, as is the case for the so called constant NAV MMF. Investors have an incentive to be the first to withdraw funds from them in time of market stress before the NAV is forced to drop.
7.3. Securities lending and repurchase agreements
Another central issue concerns securities lending and repurchase agreements as these activities can be used rapidly to increase leverage and are a key source of funds used by some shadow banking entities. The ongoing work by the Commission and the FSB is examining current practices, identifying regulatory gaps in existing regulation and looking at inconsistency between jurisdictions.
The specific issues to be covered could include: prudent collateral management; reinvestment practises of cash received against collateralised securities; re-use of collateral (re-hypothecation); ways to improve transparency both in the markets and for supervisory authorities, and, the role of market infrastructure. The Commission considers that special attention should be given to global leverage resulting from securities lending, collateral management and repos transactions in order to ensure that supervisors have accurate information to assess this leverage, the tools to control it and to avoid its excessive pro-cyclical effects. Finally, bankruptcy laws and their impact on collateral should also be reviewed with a view to increasing international consistency along with the accounting practices of such transactions.
7.4. Securitisation
It will be important to include an examination of whether the measures relating to securitisation set out earlier in this Green Paper have been effective in addressing shadow banking concerns.
In addition, the Commission is currently examining how similar measures can be taken in other sectors. The main issues include transparency, standardisation, retention and accounting requirements. The Commission services and the US Securities and Exchange Commission have therefore started comparing securitisation rules in the EU and in the US which share the goal of safer and sounder securitisation practices. Joint work has also been launched within IOSCO, in coordination with the BCBS, to help the FSB in developing policy recommendations by July 2012 aimed at requesting all jurisdictions to adopt comparable and compatible frameworks.
7.5. Other shadow banking entities[16]
Additional work on other shadow banking entities is also underway within the FSB and the EU in order to: (i) list the entities that could be covered; (ii) map the existing regulatory and supervisory regimes in place; (iii) identify gaps in these regimes; and, (iv) suggest additional prudential measures for these entities, where necessary.
Data collection is another issue to consider, as some national supervisors may not have the necessary powers to collect data on all shadow banking entities. The Commission and the European Supervisory Authorities will consult with national supervisory authorities in order to assess the situation. Depending on the results, a legislative approach at EU level could be warranted. In line with the FSB's work on data gaps, it may also be useful to ensure that supervisors have the powers to collect and share data on a global basis. In this context, the creation of a global Legal Entity Identifier (LEI) would be welcome.[17]
As stated in its Green Paper of 20 October 2010,[18] the Commission will also undertake further work on the resolution of other financial institutions. This will examine the nature of the risks for financial stability posed by various non-bank entities and explore the need for any appropriate resolution arrangements. In this context, a number of the shadow bank entities referred to in this Green Paper will be considered.
Finally, the Commission considers that further analysis should be carried out to monitor whether the new Solvency II Framework will be fully effective in addressing any issues raised by insurance and reinsurance undertakings performing activities similar to shadow banking activities.
Questions:
l) Do you agree with the analysis of the issues currently covered by the five key areas where the Commission is further investigating options?
m) Are there additional issues that should be covered? If so, which ones?
n) What modifications to the current EU regulatory framework, if any, would be necessary properly to address the risks and issues outlined above?
o) What other measures, such as increased monitoring or non-binding measures should be considered?
8. What are the next steps envisaged by the EU?
On the basis of the outcome of this consultation and the work carried out by the ESRB, EBA, ESMA and EIOPA, the Commission will decide on the appropriate follow-up regarding the shadow banking issues outlined in this Green Paper, including legislative measures, as appropriate. The Commission will continue to engage in ongoing international work, including to ensure any level playing field concerns are addressed. Any regulatory follow-up will be accompanied by a careful assessment of its potential impacts and will also take into account the results of the work of the high-level expert group on structural banking reforms recently appointed by the Commission.[19] After the publication of the group's report, the Commission will assess the need for additional, targeted consultations on selected issues, as necessary.
The Commission invites stakeholders to comment on all the issues set out in this Green Paper and in particular to respond to the questions above. In addition, the Commission is organising a public conference on shadow banking in Brussels on 27 April 2012 to which all stakeholders are invited.[20]
The responses received will be available in the Commission website unless confidentiality is specifically requested, and the Commission will publish a summary of the results of the consultation.
Stakeholders are invited to send their comments before 1 June 2012 to the following email address: markt-consultation-shadow-banking@ec.europa.eu
[1] Available at http://www.financialstabilityboard.org/publications/r_111027a.pdf
[2] Other shadow banking entities covers the entities listed in the box below, excluding MMFs.
[3] Directive 2009/111/EC of the European Parliament and of the Council of 16 September 2009 amending Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements, and crisis management, OJ L 302, 17.11.2009, p. 97–119.
[4] Directive 2010/76/EU of the European Parliament and of the Council of 24 November 2010 amending Directives 2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-securitisations, and the supervisory review of remuneration policies, OJ L 329, 14.12.2010, p. 3–35.
[5] See Annex V, point 8 of Directive 2006/48/EC as amended by Directive 2009/111/EC.
[6] See http://ec.europa.eu/internal_market/bank/regcapital/index_en.htm
[7] Commission Regulation (EU) No 1205/2011 of 22 November 2011 amending Regulation (EC) No 1126/2008 adopting certain international accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council as regards International Financial Reporting Standard (IFRS) 7 Text with EEA relevance.
[8] Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance, OJ L335/1 of 17.12.2009.
[9] Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, OJ L 145, 30.4.2004, p. 1–44.
[10] Directive 2011/61/EC of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ L 174, 1.7.2011, p.1.
[11] Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities,
[12] Available at http://www.esma.europa.eu/content/Guidelines-Common-definition-European-money-market-funds
[13] Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, OJ L 302, 17.11.2009, p. 1–31, and Regulation (EU) No 513/2011 of the European Parliament and of the Council of 11 May 2011 amending Regulation (EC) No 1060/2009 on credit rating agencies, OJ L 145, 31.5.2011, p. 30–56.
[14] Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EC) No 1060/2009 on credit rating agencies, COM(2011) 747 final of 15.11.2011.
[15] European Commission, Proposal for a Regulation of the European Parliament and of the Council on prudential requirements for credit institutions and investment firms, COM(2011) 452 final of 20 July 2011.
[16] For a list of other shadow banking entities, see foot note 2.
[17] The LEI is a global standard that would help risk management, data quality and macro prudential supervision. The FSB has set up an Expert Group to coordinate work among the global regulatory community to prepare recommendations for the appropriate governance framework for a global LEI.
[18] Available at http://ec.europa.eu/internal_market/bank/docs/crisis-management/framework/com2010_579_en.pdf
[19] http://ec.europa.eu/commission_2010-2014/barnier/headlines/news/2012/01/20120116_en.htm
[20] http://ec.europa.eu/internal_market/bank/shadow_banking/index_en.htm