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Shadow banks: 'Polluter pays' principle brushed off in EBA bank exposure proposal

Shadow banks: 'Polluter pays' principle brushed off in EBA bank exposure proposal

​Savings and retail banking trade body ESBG this week voiced concern over unplanned after-effects stemming from a European Banking Authority proposal that would place limits to banks' exposures on shadow banking entities.

​​​​​BRUSSELS, 27 ​July 2015 –  In a July 20 letter addressed to European Banking Authority EBA Chair Andrea Enria, ESBG expressed unease in what it fears could be the final outcome of the proposal – an added layer of compliance cost to banks regardless of risk each may pose to the financial system. The letter states that the “polluter pays” principle, in this case firms with high-risk bonds to shadow banks – has been snubbed by the London-based EU banking regulator.

In the one-page letter, ESBG acknowledged the merits of EBA’s intentions to create greater transparency and risk sensitivity by banks within the financial system, namely exposure from unregulated shadow banks. But it disputes the proposed shadow banks definition, calling it “too loose”. It also warns that limits set for shadow banks do not take into account effects on the real economy, such as lending to small and medium-sized companies. Such an appraisal is urgently required to properly pinpoint the policy effect, it argues.

The trade group contends the definition should be further bound by broadening the list of ruled-out undertakings. For example, firms falling under MiFID should not be treated as shadow banks. Using a wide definition, it posits, would also scupper lending to companies or a group of connected clients (GCC) with little credit intermediation activity. These are entities that would fall under the proposed definition of shadow banking, but are actually place focus on manufacturing sector segments such as a car builder and its auto finance company. Guidelines should not be passed before having carried out a complete analysis considering different alternatives. An impact study is vital before putting forward any measure.

>> See the EBA webpage on the related consultation

>> See the July 20 letter send by ESBG to EBA Chair Andrea Enria

Shadow banking; EBA Stakeholders Group; European Institutions; European Supervisory Authorities (EBA-ESMA); Supervision; Regulation