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Procedure : 2012/2115(INI)
Document stages in plenary
Document selected : A7-0354/2012

Texts tabled :

A7-0354/2012

Debates :

PV 19/11/2012 - 22
CRE 19/11/2012 - 22

Votes :

PV 20/11/2012 - 6.16
Explanations of votes
Explanations of votes

Texts adopted :

P7_TA(2012)0427

Debates
Monday, 19 November 2012 - Strasbourg OJ edition

22. Shadow banking (short presentation)
Video of the speeches
PV
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  President. − The next item is a short presentation of the report (A7-0354/2012) by Saïd El Khadraoui on shadow banking [2012/2115(INI)].

 
  
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  Saïd El Khadraoui, rapporteur. − (NL) Mr President, ladies and gentlemen, this debate on shadow banking comes at a well-chosen moment. Only yesterday, the Financial Stability Board formulated its conclusions and recommendations on the shadow banking approach. In many respects, these are actually similar to those on which you will be voting tomorrow.

In fact, the shadow banking phenomenon covers a whole range of very different forms of credit arrangement outside the conventional banking sector, and it is therefore not subject to the same rules. As the name suggests, it involves complex, often opaque financial activities not sufficiently overseen by anyone, or any institution or supervisory authority. That does not mean that forms of shadow banking could not contribute to the financing of the real economy and consequently not be described as positive.

Firstly, though, the conventional banking sector and shadow banking are clearly linked in various ways. Secondly, we know that systemic risks can potentially arise, which, furthermore, have also played a part in the development of the financial crisis, and that there is also a shift towards forms of shadow banking in order to avoid oversight and regulation of the conventional banking sector. Thirdly, it is a very large and growing phenomenon, which is estimated to encompass 25 % to 30 % of the financial sector.

For all those reasons, appropriate instruments need to be created to give the authorities an overview of the phenomenon, in order to be able to evaluate the risks and take action if necessary. Ideally, we will manage to encourage instruments that stimulate the real economy and can contribute to economic growth without causing excessive risks and to keep tight control over more speculative or risky forms.

That is therefore the subject of my report, and I thank all my colleagues and especially the shadow rapporteurs for their valuable cooperation, leading to a number of conclusions which are widely supported. I shall not mention them all in detail, but the most urgent seems to me to be the need for monitoring, the mapping of financial flows.

Supervisory authorities should have at least a general picture of the scale of repo transactions and all forms of encumbrance or clawback arrangements entered into by institutions. Hence the idea of recording information in a trade repository. There should also be a sort of central EU database of repo transactions. Common rules must be devised for reporting on transactions relating to principal, interest rate, collateral, haircuts, tenor, counterparties and the like. There is also a need for a complete overview of risk transfers by financial institutions in the form of a central register.

In fact, what it comes down is that we need to be able to find an answer to simple questions such as ‘who has to do what to whom and when and at what price?’ Also, the conventional banking sector has to be protected by setting a limit on exposure to shadow banks, and shadow banking initiated by banks must be included in the balance sheet and consolidated. As regards securitisation, stricter rules have to be applied in order to encourage quality products, and consideration needs to be given to imposing a limit on the number of times a financial product can be securitised.

Finally, a number of recommendations are being put forward for certain specific funds such as money market funds and exchange traded funds to ensure greater transparency and limit potential risks to the system.

Ladies and gentlemen, the ball is now in the court of the G20 and the Commission. It is obvious that we can devise a good response only with an overall global approach. It now depends on the institutions and regions concerned reorganising in the next few months so that a light can finally be shone on the part of the financial world that has, until now, been too obscure. That is an absolute must if we want to avoid another financial crisis in the future.

We await the proposals from the Commission, which will be presenting a communication. We look forward to receiving them and then a number of very concrete steps will be taken, which we as a Parliament will, of course, scrutinise closely.

 
  
 

Catch-the-eye procedure

 
  
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  Evelyn Regner (S&D).(DE) Mr President, we are happy to see Commissioner Hahn with us in today’s plenary. Now to the matter in hand, though: before the crisis began, it was quite usual for the banking regulations to be circumvented. Financial activities were increasingly moved to less tightly regulated arenas – to shadow banks. All in all, we have 1 400 of these establishments, a huge number of these establishments which have gone bust. None of them had any importance to the system individually; but collectively the loss to the European economy was huge, and it rocked the financial system to its foundations. This selective regulation of banks must be stopped if we want, in future, to plug the loopholes exploited by the wide boys of the money markets. We do want to, and we need to do it fast.

Many shadow banks receive state aid, but act without any state oversight – all the more reason to regulate them. The central registry mentioned by Mr El Khadraoui should be the basis for doing that. However, we also need caps on third-party capital holdings, liquidity buffers and capital charges.

 
  
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  Elena Băsescu (PPE).(RO) Mr President, I too commend this initiative, which aims to improve the monitoring and regulation of shadow banking. It will enable prudential considerations and those related to the conduct of the market to be addressed appropriately, through stricter supervision. We need to have an overall picture that would enable trends in this sector to be identified, and there is a need for close international cooperation to this end. We must take account both of the positive aspects, and of the risks and factors that need to be remedied.

In this context, I would stress the importance of eliminating incorrect practices and reducing systemic risk. This is the only way to achieve a high level of transparency and to increase the safety and stability of the financial system, and we will be able to feel the positive effects of shadow banking too, in the real economy and on stimulating economic development.

 
  
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  Sergio Gaetano Cofferati (S&D).(IT) Mr President, ladies and gentlemen, we are discussing a phenomenon which, over the past few years, has become vastly more widespread, with potential advantages for the economy and, to be honest, large risks and high levels of damage to many people and many families who have been affected by an activity which is not always controlled and who have been attracted by supposed advantages which have never actually materialised.

I therefore believe that it is very important, in the first place, to learn about the phenomenon and then to take control, step by step, of its natural development. Thus, the monitoring of transactions is one of the central points and perhaps the most delicate and important question; for it is odd that we are undertaking a discussion, albeit a useful one, on banking supervision by the European Central Bank and, at the same time, we are not taking sufficient account of actual phenomena that are going on and which penalise consumers.

 
  
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  Ildikó Gáll-Pelcz (PPE).(HU) Mr President, this subject could not be more topical, since it comes at the same time as the regulation of bank capital requirements, the development of banking supervision and the practical implementation of the European Semester. The European Union is clearly making an effort to evaluate the reasons behind the financial crisis that has developed so as to avoid or prepare for any financial events in the future. We must pay attention to ensuring that shadow banks operate in a transparent manner that does not cause systemic risks in the future. It is common knowledge that, although their activities may stimulate trade and act as a stimulus for liquidity flow, they are also capable of causing great damage at the same time, in the absence of a protection network for the traditional banking system. In actual fact, the key is to take precautions and to prevent shadow banking based on hedge funds, money-market funds and investment instruments from threatening European banks and exposing money markets to systemic risk. The goal is clear; we still have time to develop the means.

 
  
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  Monika Flašíková Beňová (S&D).(SK) Mr President, shadow banking as such takes place via entities or financial contracts generating a combination of bank-like functions but outside the regulatory perimeter or under a regulatory regime that is either insufficiently thorough or addresses issues other than systemic risks. Regulated entities in the regular banking system take part extensively in those activities defined as part of the shadow banking system, and are, in many ways, interconnected with shadow banking entities. Estimates suggest that the size of the global shadow banking system in 2011 was approximately EUR 51 billion. This represents up to 30 % of the total financial system and half of total bank assets. Moreover, shadow banking has been identified as one of the main possible triggers or factors contributing to the financial crisis, and can threaten the stability of the financial system. Therefore, we need complete oversight of shadow banking.

 
  
 

(End of the catch-the-eye-procedure)

 
  
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  Johannes Hahn, Member of the Commission. Mr President, I would like to thank in particular Mr El Khadraoui who coordinated this report, but also other Members for an important contribution to the debate and for emphasising that regulators should not forget some actors and entities commonly designated under the term ‘shadow banking sector’.

The views expressed in the Parliament report are in line with the Commission’s concerns and the objectives: firstly, to strengthen the resilience capacities of the global financial sector and, secondly, to reduce regulatory arbitrage possibilities. I am glad to share these concerns with you. Your concrete request to act reinforces our willingness to keep these issues very high on the Commission’s agenda.

What do we mean by shadow banking? Shadow banking comprises financial entities or activities which carry out credit intermediation activities outside the regulated sector. In practice, risks linked to these activities were observed in 2008, when special purpose vehicles were purchased and then securitised illiquid assets and subprime mortgages were converted into assets such as collateralised debt obligations. These assets were bought by many investors worldwide and then turned out to be worthless and illiquid. Unfortunately, we all now know the consequences of such strategies.

Why should regulators focus on the shadow banking sector? Firstly, this sector constitutes a very large amount of financial activities. The FSB has roughly estimated the size of global shadow banking at around EUR 46 trillion in 2010 having increased from EUR 21 trillion in 2002. Secondly, the sector is highly interlinked with the regulated sector and especially with banks. Potential contagion effects are high and could materialise very quickly, with an impact on the whole economy. For instance, when money market funds suffered from financial pressures, they suddenly had to stop the investments in short instruments issued by banks and non-financial corporations. As a result, there was a credit crunch in this market. Finally, at the same time that regulators are strongly strengthening potential rules for banks – CRR, CRD 4 – it would be highly undesirable to keep some actors or entities outside the supervisory oversight. I would directly generate regulatory arbitrage opportunities and give incentives for financial entities to develop risky activities in less regulated areas of shadow banking.

For all these reasons the Commission drafted a Green Paper on shadow banking to identify the appropriate measures to regulate these risks in Europe. It is key to working in a consistent way with our G20 and Financial Stability Board partners, while adjusting our work to specific European issues. The European Systemic Risk Board contribution to this debate will be very helpful for the Commission, as well as all the contributions to the Green Paper that have been received.

In early 2013, the Commission will present a roadmap on shadow banking in the EU focusing on three priorities: firstly, the strengthening of transparency and data collection and monitoring; secondly, money market funds, and, thirdly, strengthening policies in the field of repo and securities lending transactions.

I thank Parliament for its support, through this excellent report, for the Commission’s work to strengthen our financial sector, to reduce systemic risk and to reduce the scope for regulatory arbitrage. I understand your request that the Commission acts on the shadow banking sector. This is a clear signal and we will act on it in the coming months.

 
  
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  President. − That concludes this item.

The vote will take place on Tuesday at 12.00.

 
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