Chasing Shadows: The Financial Stability Board and the European Commission Release Shadow Banking Proposals
The Financial Stability Board (“FSB”) and the European Commission (“EC”) each recently published policy recommendations regarding the shadow banking system.
The Financial Stability Board
The FSB’s recommendations address risks associated with the interaction between the regular banking system and the shadow banking system; the susceptibility of money market funds to “runs;” securitizations; and pro-cyclical incentives associated with securities financing transactions. The recommendations are made in a series of three reports: an overview, which sets out the FSB’s overall approach; a report on the risks posed by securities lending and repos, and recommendations for addressing those risks; and a report on the framework for assessing and addressing risks posed by shadow banking entities other than money market funds (“MMFs”). Comments on the FSB’s consultative proposals should be submitted on or before November 28, 2013.
The European Commission
Last week, the European Commission issued its own communication concerning shadow banking. The EC’s statement, which is in line with the goals set forth by the FSB, explains where the Commission will take further action which includes, for example, action in the areas of transparency, money market funds, collective investment in transferable securities, and securities financing.
As a first step in implementing its shadow banking policy the EC proposed new rules for money market funds domiciled or sold in Europe. Under the proposal, MMFs would be required to have at least 10 percent of their portfolio in assets that mature within a day and another 20 percent that mature within a week. A MMF’s exposure to a single issuer would be capped at 5 percent of the MMF’s portfolio (in value terms). For standard MMFs, a single issuer could account for 10 percent of the portfolio. MMFs with stable net asset values would be required to establish a capital buffer of 3 percent of assets under management.