Shadow Banking. June Avocats à la Cour

Transcription

1 Shadow Banking June 2013 Avocats à la Cour

2 Index 1. Introduction 3 2. Definition of Shadow Banking Entities Activities 4 3. Benefits and risks Benefits Risks 4 4. Challenge for supervisory and regulatory authorities 5 5. Regulatory measures in the EU 5 6. Outstanding issues Banking regulation Asset management regulation issues Securities lending and repurchase agreements Securitisation Other Shadow Banking entities 8 7. The next steps envisaged by the EU 8 8. Statements of FSB, ESMA, ALFI and EFAMA FSB ESMA ALFI EFAMA 9 2

3 1. Introduction In 2008 the world experienced another financial crisis. The international response was notably coordinated at the level of the G20 and the Financial Stability Board (the FSB ). A lot of reforms were initiated in order to establish stable and responsible financial markets. One aspect has been in the focus: the area of nonbank credit intermediation (so called Shadow Banking ). The European Commission (the Commission ) considers it a priority to examine in detail the issues posed by Shadow Banking. A Green Paper was drafted with the purpose to take stock of current development and present on-going reflections on the subject to allow for a wide-ranging consultation of stakeholders. The Green Paper is based on a FSB report of October Definition of Shadow Banking This FSB report defined Shadow Banking as the system of credit intermediation that involves entities and activities outside the regular banking system. Therefore, the Shadow Banking is based on two intertwined pillars: 2.1 Entities outside the regular banking system engaged in accepting funding with deposit-like characteristics; performing maturity and/or liquidity transformation; undergoing credit risk transfer; and using direct or indirect financial leverage. Here the Commission is focussing on (not exhaustive list): Special purpose entities which perform liquidity and/or maturity transformation like securitization vehicles such as asset backed commercial paper conduits, Special Investment Vehicles and other Special Purpose Vehicles ( SPVs ); Money Market Funds ( MMFs ) and other types of investment funds or products with deposit-like characteristics, which make them vulnerable to massive redemptions ( Runs ); investment funds, including Exchange Traded Funds ( ETFs ), that provide credit or are leveraged; finance companies and securities entities providing credit or credit guarantees, or performing liquidity and/or maturity transformation without being regulated like a bank; and insurance and reinsurance undertakings which issue or guarantee credit products. 3

4 2.2 Activities outside the regular banking system which include securitisation, securities lending and repurchase transactions ( Repo ). The FSB has estimated the size of the Shadow Banking at about 46 trillion in This represents 25-30% of the total financial system. 3. Benefits and risks 3.1 Benefits Shadow Banking is deemed to be a useful part of the financial system. Such is the case where (i) they provide alternatives to bank deposits; (ii) they channel resources towards specific needs more efficiently due to increased specialisation; (iii) they constitute alternative funding for the real economy; and (iv) they are a possible source of risk diversification away from the banking system. 3.2 Risks They relate to the complexity of Shadow Banking entities and activities, their cross-jurisdictional reach, the inherent mobility of securities and fund markets and the interconnectedness with the regular banking system. They can be summarised as follows (not exhaustive list): (i) (ii) (iii) (iv) Deposit-like funding structures may lead to Runs Shadow Banking activities are exposed to similar financial risks as banks, but without being regulated and supervised in a comparable manner. Build-up of high, hidden leverage Because of the lacking regulation and supervision, Shadow Banking activities can be highly leveraged with collateral funding being churned several times. This can increase the fragility of the financial sector. Circumvention of rules and regulatory arbitrage The regular banking system could try to circumvent its applied regulation and supervision by imitating Shadow Banking entities or outsourcing certain operations into Shadow Banking entities. Disorderly failures affecting the banking system Due to the close connection between the regular banking system and the Shadow Banking, any failures can lead to important contagion and spill-over effects. 4

5 4. Challenges for supervisory and regulatory authorities To counter these potential risks in an adequate way, it is essential that supervisory and regulatory authorities consider how best to address Shadow Banking entities and activities. However, this task carries several challenges: First, the relevant Shadow Banking entities, including their activities, have to be identified and monitored. Therefore, all of the existing data gaps between banks and non-bank financial institutions need to be filled on a global basis. This could require the establishment of permanent processes and a close coordination among all EU supervisors, the Commission, the central banks and the national supervisory authorities. Secondly, the authorities concerned have to determine the approach to supervise Shadow Banking entities. In the Green Paper, the Commission inter alia recommends to take into account already existing supervisory capacity and expertise and to perform at an appropriate i.e. national and/or European level. Thirdly, any regulatory measure should align the same general principles. These principles imply that regulatory measures should be targeted, proportionate, forward-looking and adaptable, effective and subject to assessment and review. Moreover, the Commission considers that a specific approach for each kind of entity and/or activity must be adopted. In this respect, the Commission outlines three possible and complementary measures. 5. Regulatory measures in the EU These three measures are as follows: (i) Indirect regulation of Shadow Banking activities through the banking and insurance regulations The following steps should indirectly address the Shadow Banking issues raised by securitisation structures and to deter regular banks from circumventing existing capital requirements and other legislation: the revision and amendments of the EU banking capital requirement directives in 2009 ( CRD II ) 1 and 2010 ( CRD III ) 2 so that both originators and sponsors retain a substantial share of their underwritten risks, reinforce the treatment of liquidity lines and credit exposures, strengthen capital requirements and require competent authorities in all Member States for certain cases of carrying out there risk assessment of individual banks. The latest revision ( CRD IV ) is planned for 2015; the proposal includes liquidity facilities for SPVs and any other products or services linked to a bank s reputational risk to deter banks to circumvent existing capital requirements; 1 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, , p 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, , p

6 In November 2011, the Commission endorsed an amendment to the International Financial Reporting Standards ( IFRS ) which improves the disclosure requirements concerning the transfer of financial assets (related to IFRS 7). 3 The Commission is also analysing the new standards on consolidations (related to IFRS 10-12); and In the insurance sector (under the rules implementing the Solvency II Framework Directive ( Solvency II ) 4 ) the Commission plans to require originators and sponsors to meet risk retention requirements comparable to those set out in banking legislation. (ii) Enlarging the scope of current prudential regulation to shadow banking activities For the purpose of having a broader coverage, addressing systemic risks and making future regulatory arbitrage more difficult, the scope of existing regulations should be extended to new entities and activities. So the Markets and Financial Instruments Directive ( MiFID ) 5 was reviewed and a recast directive and regulation was proposed by the Commission in order to: broaden the scope of this framework; increase the transparency of non-equity instruments; and entrust national supervisory authorities and ESMA with increased intervention powers. It remains to mention that MiFID does not directly impose capital requirements, but cross-refers to the Capital Requirements Directive and thereby imposes bank-like prudential regulations on entities performing Shadow Banking activities. (iii) Direct regulation of some shadow banking activities The EU has adopted measures to regulate Shadow Banking entities directly: The Alternative Fund Managers Directive ( AIFMD ) 6, which already addresses a number of Shadow Banking issues; The legislation on undertakings for collective investments in transferable securities ( UCITS ) 7 as well as the relating ESMA guidelines for MMFs and ETFs; 3 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 Standards (IFRS) 7 Text with EEA relevance. 4 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, QJ L335/1 of Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets in financial instruments, OJ L 145, , p Directive 2011/61/EC of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directive 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ L 174, , p 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 investments in transferable securities. 6

7 A stringent regulation and supervision of Credit Rating Agencies ( CRAs ) by ESMA 8 because of their important role in the credit intermediation chain; moreover, additional legislative measures to strengthen the credit rating process were proposed by the Commission; 9 and Solvency II for insurance regulation, which already addresses a number of Shadow Banking issues, in particular 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. 6. Outstanding issues In addition to the above, the Commission examines already existing measures and wishes to propose an appropriate approach to ensure the comprehensive supervision of the Shadow Banking system coupled with an adequate regulatory framework. There are five key areas which the Commission is considering: 6.1 Banking Regulation The overarching aim is to: recapture for prudential purposes and faulty 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. This shall be achieved by the examination of the consolidation rules and the relation of bank exposure to Shadow Banking entities. Therefore, several detailed issues need to be investigated further. The Commission considers to enlarge the existing scope of the relevant EU banking legislation. 6.2 Asset management regulation issues In relation to ETFs, the FSB has identified a possible mismatch between liquidity offered to ETF investors and lessliquid underlying assets. The current regulatory debate focuses on several issues, which not all are 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 a counterparty. Moreover, ESMA has carried out a review of the UCITS framework inter alia as regards the potential application to ETFs. In relation to MMFs, the most important matters are the risk of Runs and the systemic risk. 8 Regulation (EC) No 1060/2009 of the European Parliament and of the Council of 16 September 2009 on credit rating agencies, OJ L 302, , 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, , p 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 on

8 6.3 Securities lending and repurchase agreements Securities lending and repurchase agreements are a key source of funds for some Shadow Banking entities. The Commission, as well as the FSB, strive to examine current practices, identify regulatory gaps and look at inconsistency between jurisdictions with a view to detailed issues to be covered. 6.4 Securitisation The Commission is currently examining whether the measures relating to securitisation, as set out earlier in this cross-reference, have been effective in addressing Shadow Banking concerns. Therefore, a comparison of the securitisation rules, which aim a safer and sounder securitisation practice, was started in the EU member states. 6.5 Other Shadow Banking entities 10 Moreover, the EU and the FSB are currently working on other Shadow Banking entities in order to: list the entities that could be covered; map the existing regulatory and supervisory regimes in place; identify gaps in these regimes; and where necessary suggest additional prudential measures for these entities. Data collection, the resolution of other financial institutions and further analyses regarding the effectiveness of the new Solvency II framework with a view to insurance and reinsurance undertakings performing activities similar to Shadow Banking activities are other issues to consider. 7. The next steps envisaged by the EU With regard to the outcome of the Green Paper and the work carried out by the involved organisations, the Commission will decide on the appropriate follow-up regarding the Shadow Banking issues. The Commission will continue to engage in on-going international work. On 27 April 2012 a public conference on Shadow Banking was held in Brussels. Afterwards, the stakeholders commented on all issues set out in the Green Paper. The analysis of the comments received suggests that there is support for regulatory measures in the EU subject to the key principles. Following to the Green Paper consultation and the public conference in April 2012, the European Commission has initiated a number of discussions with stakeholders and has launched specific and targeted consultations. In May 2013, a draft of the Communication from the European Commission on the Shadow Banking system leaked, alongside with the draft proposal for a reform of the money market sector. A key issue of the draft Communication is how any Shadow Banking regulation will fit with other financial regulations in the pipeline or already in force, such as inter alia AIFMD, UCITS and Solvency II. It is to be considered that the draft Communication is still at an early stage and subject to change. The publication of the final recommendations is scheduled for June. 10 For a list of other Shadow Banking entities, see the enumeration on page 2, excluding MMFs. 8

9 8. Statements of FSB, ESMA and ALFI 8.1 FSB On 18 November 2012, the FSB has published a Global Shadow Monitoring Report as well as some Consultative Documents comprising an initial integrated set of policy recommendations and frameworks on strengthening oversight and regulation of the Shadow Banking system. By 14 January 2013 FSB welcomes comments on these documents. The final recommendations are expected to be published in September ESMA On 24 July 2012 ESMA published its response to the Green Paper. ESMA broadly agrees with many of the views and opinions expressed by the Commission (e.g. the definition of Shadow Banking), but considers that it is crucial to have a flexible and evolving framework that would allow the inclusion of financial innovations. 8.3 ALFI On 15 June 2012 ALFI commented on the Green Paper. ALFI agrees with the need to ensure all aspects of the financial system are properly regulated and fully supports a level playing field of appropriate regulation covering such activities. ALFI believes that it is important to ensure any such regulation is proportionate to the risks being addressed. Moreover, ALFI commented on the FSB Consultative Document. Hereby, ALFI stressed the same points as already mentioned before regarding its comments on the Green Paper. Relating to its comments on the FSB Consultative Document, ALFI provided two tables of (Shadow Banking) risks, one showing these risks covered by measures implemented by the AIFMD and the other showing these risks covered by measures implemented by UCITS regulations & European MMFs. 8.4 EFAMA In May 2012, EFAMA published its response to the Green Paper. EFAMA supports the objectives pursued by the European Commission to identify and close any regulatory gaps as well as inefficiencies in the supervision of the financial sector in general. EFAMA deems it to be extremely important that the authorities aim at gathering a good understanding of the potential impact and possible unintended consequences of targeted proposals of new regulations on the non bank financial activities and players. Nevertheless, EFAMA supports the approach of the FSB that becomes apparent in its comments on the FSB Consultative Document on 14 January There EFAMA confirms the importance to focus the attention primarily on unregulated activities potentially threatening the stability of the financial system as well as his criticism to the definition of Shadow banking set by the European Commission. 9

10 IMPORTANT NOTICE This document is for information purposes only. The information it contains are not intended to provide either tax or legal advice. Recipients must not act on the basis of this document without seeking specific prior professional advice. Luther does not accept any responsibility for any loss to any person acting or refraining from acting on the basis of the information contained in this document. Luxembourg, June

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