Brighter Light on Shadow Banking

I won approval for my proposals to reduce risk in the shadow banking sector.

As a Member of the Economic and Monetary Affairs Committee, and its rapporteur for regulation of the Money Market Funds (MMF), my work was favoured by a cross-party 2:1 majority of Econ Members.

In April, I will seek Parliament’s approval at the plenary session in Strasbourg.

From the outset this was a difficult task. 

Our financial sector is a global, complicated web of connections and interconnections.  It difficult to ascertain where boundaries of regulation should lie, yet, an absolute certainty that too much will push investors elsewhere.

Long term pre-occupation with banking scandals, has pushed shadow banking into a media hinterland – eliciting little general interest and understanding.  Even though, the EUs shadow banking sector is worth 1 trillion, and MMF are an important source of finance for SMEs.

And, one year ago, Parliaments previous ECON Committee shelved making a decision on MMFs, because it was too ‘controversial.

This is an essential step in preserving an important source of liquidity.

MMF are a market alternative to bank deposits.  As banks have de-risked and de-leveraged, their  importance to real economy businesses has increased.

My challenge was to contain the risk in Constant Net Asset Value MMF, which promise a 1 payout for every 1 invested.

Market uncertainty can trigger a massive outflow from these funds.  The outflow can turn into a liquidity bottleneck, and ultimately, calls on the banks and other financial institutions which sponsor the funds.  Hey presto!  A run on the banks and financial crash.

My proposals deliver 3 new CNAV Funds (retail, government and LVNAV) which regulate risk through limiting the type of investments the funds can make, and by setting new daily and weekly liquidity thresholds, stricter diversification limits, ban on sponsor support, and imposing fees and redemption gates.

I believe this will prove an effective system of checks and balances, whilst preserving an important source of market finance.