The regulation of the shadow banking system in the European Union

Abstract

Introduction: The European Union is the second-largest market of shadow banking activities, which represent an important part in the post-crisis regulatory reform. Not subject to traditional banking regulation, characterized with specific advantages in terms of credit mediation and also specific risks such as systemic and risk of bank runs the shadow banking entities are an important part of the newly forged financial order. PURPOSE: To show the risks and advantages of shadow banking and to analyse some of the regulatory actions taken in the European Union concerning it. METHODS: Analysis of publications, policy and framework recommendations by regulatory bodies and organizations. Evaluation of said recommendations’ ability to cope with shadow bank specific risks. CONCLUSIONS: Many of the risky activities once normal to traditional banks have since the postcrisis regulatory reform migrated to the less regulated shadow banking sector. As more funds seek higher profit in financial markets, the more important the issues in the shadow banking sector become. European authorities must seek a balance between regulation and deregulation so as not to push the same funds away, especially when Europe is facing a slow recovery. Issues in transparency, investor disclosure, reporting and data collection are central to a successful reform.