The first risk results from the “complexity and opacity” of activities. “Not only are there a wide range of entities involved… but the different ways in which they interact are many and varied.”
The second was the interlinkages of shadow banking with the financial system. “Shadow banking does not exist in a separate ring-fenced area… it is fully interwoven into the financial system.”
The third is size, which he estimates to be about one-third of the EU financial system. “It is a very significant component of the financial system and deserves the right regulatory and supervisory supervision.”
The final challenge is how best to regulate shadow banking. “Although there is broad consensus that more transparency is desirable, further discussion is needed on the precise regulatory and supervisory approach to this complex area.”
“Shadow banking can be an important source of funding for the economy – but we are all aware that banking is facing very big difficulties and there is a big concern about the gap between what the EU’s real economy needs and what is provided by the banks.”
He added that while shadow banking could constitute an alternative source of lending, and some channels could contribute towards financing such as securities assets, “however, there is some evidence that much of the financing provided by shadow banking remains within the financial system, meaning that the impact on the real economy is limited”.
Taking into account the upcoming regulatory requirements, “we should remain realistic about the extent to which it could become a replacement for traditional banking.”
Steven Maijoor was speaking at the Isla Annual Conference, 19 June 2013.