Shadow Banking


Although the 2008 crisis in financial markets centred on the banking sector, it generated a broader concern amongst regulators and policymakers about potential sources of risk in the global financial system. The Financial Stability Board (FSB) has defined shadow banking as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system”.

Interest in this sector has grown during the years following the crisis, particularly at the international level. This was driven initially by concerns that tighter controls on the traditional banking system (particularly higher capital charges) would incentivise a growth in the non-bank sector and, more recently, by recognition that the scale of bank deleveraging will require economies to look outside banks to secure the finance necessary for growth.

Increasingly policymakers discuss ‘market-based finance’ or ‘ non-bank lending’, rather than the initial term of 'shadow banking', reflecting the growing importance of alternatives to banks. At both EU and international level, however, work continues to assess the role such sources of finance can – and should – play, and which rules, including of a macroprudential nature, should apply to them. The current focus for closed-ended funds such as private equity is on rules related to leverage - and in particular the IOSCO work on developing a consistent assessment of global leverage.

Invest Europe Position

Policymakers at global and at EU level have recognised the difficulties in defining ‘shadow banking’, and initial attempts to use a definition based on types of entity have been replaced by a more productive focus on activities and their specific features.

Invest Europe supports this broad approach as it avoids any inadvertent definition of a broad range of funds – such as private equity funds – as ‘shadow banks’.

Both the European Commission’s September 2013 Communication on Shadow Banking and the FSB have recognised that even if a particular activity is to be categorised as ‘shadow banking’ its existing regulation and supervision may well be appropriate for the risk that is posed.


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