EBA finalises shadow banking and NSFR proposals
18 December 2015 London
Image: Shutterstock
The European Banking Authority (EBA) has finalised its guidelines on limits on institutions' exposures to ‘shadow banking’ entities and recommended the introduction of the net stable funding ratio (NSFR) for the EU.
The shadow banking guidelines, which come into force on 1 January 2017, centre on the decision to allow EU institutions to set internal limits for their exposures to shadow banking entities.
The EBA hopes this approach will address, in a proportionate way, the risks that these exposures pose to the EU banking sector.
The guidelines will support institutions and banking supervisors across the EU in minimising the risks arising from exposures to entities that carry out bank-like activities outside regulated frameworks, according to the EBA.
For those institutions that do not have sufficient information on their exposures to shadow banking counterparties, the EBA will require a ‘fallback approach’ involving a fixed limit to all or some of these aggregate exposures.
The EBA has focused the guidelines on entities that it considers to pose the greatest risks in terms of both the direct exposures institutions face and also the risk of credit intermediation outside the regulated framework.
Shadow banking entities are defined by the EBA as entities that carry out credit intermediation activities (ie, bank-like activities involving maturity transformation, liquidity transformation, leverage, credit risk transfer or similar activities) without falling within the scope of consolidated supervision (or equivalent third-country legal frameworks).
In addition, ‘excluded undertakings', which are subject to an appropriate and sufficiently robust prudential framework, will not be considered as shadow banking entities.
Isabelle Vaillant, director of regulation at the EBA, stated: “Shadow banking has the potential of putting the stability of the financial system at risk.”
"Recent global financial crises have revealed fault lines which were previously unknown, but can transfer risks from the unregulated to the regulated banking system.”
The EBA also recommended the introduction of the NSFR in the EU to ensure stable funding structures.
In its report on the regional study, the EBA stated: “The analysis did not find strong statistical evidence of significant negative impacts of the NSFR on bank lending, financial assets markets or trading book positions.”
The EBA went on to clarify that, while the Basel NSFR standard is seen as fitting well within the EU banking framework, certain EU specificities should be taken into account such as trade finance, pass-through models, central counterparties, centralised regulating savings and residential guaranteed loans.
The shadow banking guidelines, which come into force on 1 January 2017, centre on the decision to allow EU institutions to set internal limits for their exposures to shadow banking entities.
The EBA hopes this approach will address, in a proportionate way, the risks that these exposures pose to the EU banking sector.
The guidelines will support institutions and banking supervisors across the EU in minimising the risks arising from exposures to entities that carry out bank-like activities outside regulated frameworks, according to the EBA.
For those institutions that do not have sufficient information on their exposures to shadow banking counterparties, the EBA will require a ‘fallback approach’ involving a fixed limit to all or some of these aggregate exposures.
The EBA has focused the guidelines on entities that it considers to pose the greatest risks in terms of both the direct exposures institutions face and also the risk of credit intermediation outside the regulated framework.
Shadow banking entities are defined by the EBA as entities that carry out credit intermediation activities (ie, bank-like activities involving maturity transformation, liquidity transformation, leverage, credit risk transfer or similar activities) without falling within the scope of consolidated supervision (or equivalent third-country legal frameworks).
In addition, ‘excluded undertakings', which are subject to an appropriate and sufficiently robust prudential framework, will not be considered as shadow banking entities.
Isabelle Vaillant, director of regulation at the EBA, stated: “Shadow banking has the potential of putting the stability of the financial system at risk.”
"Recent global financial crises have revealed fault lines which were previously unknown, but can transfer risks from the unregulated to the regulated banking system.”
The EBA also recommended the introduction of the NSFR in the EU to ensure stable funding structures.
In its report on the regional study, the EBA stated: “The analysis did not find strong statistical evidence of significant negative impacts of the NSFR on bank lending, financial assets markets or trading book positions.”
The EBA went on to clarify that, while the Basel NSFR standard is seen as fitting well within the EU banking framework, certain EU specificities should be taken into account such as trade finance, pass-through models, central counterparties, centralised regulating savings and residential guaranteed loans.
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