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Regulatory arbitrage should also be avoided where financial market infrastructures (FMIs) operate under multiple licences. As such, any proposed framework should ensure that an FMI that also holds a banking licence cannot determine at its own free will whether to abide by the banking resolution framework, which will not have addressed all FMI specificities, or the alternative non-banking framework. For this reason, a functional approach with clear rules determining which legal framework should apply to the various activities of infrastructures, ensuring a level playing field, and assigning responsibilities among the relevant authorities should be introduced.
The EBA would also like to stress the importance of consistency between a European framework for resolution and recovery and the initiatives under way in CPSS-IOSCO2 and the FSB3. Both documents provide an important basis for globally aligned crisis management approaches in respect of FMIs and financial institutions more broadly.
The EBA notes that the consultation does not, at this stage, include any proposal to extend recovery and resolution measures to other financial entities which are traditionally included in the so called ‘shadow banking’ sector, such as money market funds and hedge funds. This is particularly relevant as the use of hedge funds could increase once new prudential requirements for securitisations apply to banks and investment firms. Subject to a clear articulation of the wider social and economic benefits, in the EBA’s view it should be considered to what extent these entities can be included in any non-bank recovery and resolution framework. To the extent possible, any proposed legislation should also be consistent with the FSB work-stream on shadow banking.
For other non-bank financial institutions, the consultation paper notes that the relationship between these and overall financial stability has not been fully articulated and that approaches and tools for the measurement of financial instability and financial distress are better developed for banks.
Whilst the EBA agrees that work in this area is still relatively immature, the risks should not be underestimated and any legislative proposal should at least consider a future extension to capture these entities.