EU Financial Controllers of the World?

by Drake

The European Commission, led by Jose Manuel Barroso, argues financial institutions like hedge funds are not transparent enough to the authorities
Tim Wallace
May 7, 2013, 6:06am

Leak reveals planned regulation in Europe of the world’s €51 trillion shadow bank sector

LENDING to the real economy could take another blow as the European Commission (EC) plans to tighten the rules around finance firms like hedge funds and money market funds, analysts warned yesterday.

Leaked documents show Brussels plans to introduce liquidity buffers and leverage caps as part of a new crackdown on so-called shadow banks.

And the EU also plans to put pressure on banks to push them into doing less business with the less heavily regulated parts of the market.

The EC argues funds carry out activities very like those of banks, effectively taking deposits and lending them out.

As those activities carry risks like those in banking, it wants greater control over the industry. And because they carry out trades with banks – like buying and selling derivatives – traditional banks face risks from the sector.

But analysts fear the rules, which include plans to cap funds’ leverage, limit the maturity of investments in some funds and cap the proportion of derivatives in some portfolios, could hurt the rest of the economy.

“The biggest risk is that you cut off lending – this is a big avenue for lending outside banks into the real economy. It is not a great time to bring down that source of credit,” Open Europe’s Raoul Ruparel told City A.M. “As with all EU regulation there is a risk they could push activity elsewhere and London could lose a lot of business.”

The Investment Management Association (IMA) fears the regulations may be dangerously inflexible.

“All too often, the Commission puts far too much detail in the process right at the start, hardwiring it into legislation,” said the IMA’s Julie Patterson. “It makes rules more uniform across the EU, but it makes it very hard to change as markets evolve. Legislation is always years behind what happens in the marketplace.”

The leaked plans, published by Open Europe, said: “The EC’s approach consists in tackling all financial risks globally and comprehensively and ensuring the positive advances achieved by reinforcing certain actors and markets are not diminished by financial risks being moved towards less highly regulated sectors.”

Drake | May 8, 2013 at 3:30 pm