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“There’s no question that the shadow banking sector needs effective regulation. At the same time, politicians should focus more on activities and less on rapidly changing institutions. I warn against making any rash decisions, though", said Michael Kemmer, General Manager of the Association of German Banks, before journalists in Frankfurt.
The shadow banking sector is by no means unregulated. The Basel capital rules specifically include, for example, transactions between regular banks and the shadow banking sector. In addition, EU Directives which set requirements for investment funds and investment fund managers regarding the type and size of investments cover the shadow banking sector as well. And the development of macro-prudential supervision, with the required institutions such as the European Systemic Risk Board (ESRB), is also part of regulation of the shadow banking sector.
The Financial Stability Board (FSB) set up by the G20 will be presenting concrete proposals for further regulatory steps at the end of the year. The German banks see this, above all, as the chance to implement the “same risks, same rules” principle in a global context, particularly also when it comes to creating a level playing field between the US and Europe.
“It would be unfortunate should the transatlantic regulatory divide become wider still because the end result is even tighter regulation of banks in Europe, due perhaps simply to the perception here that banks are easiest to regulate. Regulation of the shadow banking sector shouldn’t be a case of only looking for the missing house keys under the lamppost because it’s so nice and bright there. So we hope that the EU doesn’t try to go it alone on regulation”, Mr Kemmer added.
The aim of regulation must be to minimise and, if possible, eliminate the systemic risk of a bank run in the shadow banking sector. In the regular banking sector, this has been achieved through a combination of banking supervision, deposit protection and access to central bank funds to ensure liquidity. As the shadow banking sector obtains liquid funds solely via collateralised lending, regulation is likely to be successful if it results in the highest quality and liquidity standards being applied to collateral deposits.