Ireland and Luxembourg are increasing calls for tougher shadow banking rules

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Ireland and Luxembourg have intensified calls for tougher global rules on shadow banks in a bid to curb the risk of further financial turmoil erupting from sectors that include everything from hedge funds to crypto companies.

Senior officials from the two EU member states, which together host shadow banks with around €10tn in assets, want regulators to develop stricter standards for a sector that remains subject to less regulation than traditional lenders despite owning about half of all system assets. finance.

Vasileios Madouros, deputy governor of financial regulation at the Central Bank of Ireland, told the Financial Times that Dublin would ask the risks posed by an industry that has more than doubled in size since the 2008 global financial crisis to be contained by , comprehensive.

Marco Zwick, head of fund regulation at Luxembourg regulator Commission de Surveillance du Secteur Financier, said: “We have seen that international crises cannot be responded to by national initiatives alone; it requires a global response.

Total assets of shadow banks have increased to $240 trillion since 2008, according to research from the Financial Stability Council’s global watchdog. The push for stricter rules has become notable following a series of crises stemming from the sector, which is less regulated than the banking industry because companies do not hold retail deposits and are not held responsible for the global financial crisis.

Setting global standards is also complicated by the wide differences between the institutions that fall under the shadow bank label.

The growth of shadow banks line chart from 2008 shows shadow banks have carved out a larger share of global finance

Ireland and Luxembourg were at the center of recent crises, when a rapid sell-off by funds held by those countries forced the Bank of England to launch a £65 billion bond-buying program in September.

In response, Dublin wanted a framework for all shadow banks that considers not only the risks posed by individual companies but also the impact of the whole system. “This is an area where we want to see meaningful progress,” said Madouros. The central bank will soon publish a paper outlining its proposal, he added.

Luxembourg, meanwhile, has been “actively working” to push for tougher global rules, through its membership in groups such as the Financial Stability Council, which frames global policies for financial stability, and Iosco, which coordinates global securities regulation, Zwick said. More work needs to be done to “further enhance and develop existing standards for liquidity risk management”.

Experts argue that countries have an element of self-interest in calling for tougher global rules rather than imposing tougher rules themselves.

“The old story is that you don’t want to put a damper on the domestic sector which generates a lot of tax revenue and which puts you ahead on the international stage,” said Richard Portes, European Systemic Risk co-chair. A group of experts with the Board on shadow banking and a professor at the London Business School.

Line chart Total financial assets ($ billions) showing holdings of money market funds have increased sharply since 2008

“There is a reputational risk [to Ireland],” said one financial stability expert, adding that more volatility stemming from the sector “could make European investors and authorities more cautious and make it more difficult for Ireland.”

However, one financial regulator said it was “very difficult” for national authorities to “really figure out” what the global risks of a fund headquartered there were.

Ongoing work globally includes increasing the liquidity of money market funds and open funds.

Ireland, whose €4.6tn fund sector is about 13 times the size of the country’s economy as measured by gross national income, cannot rely on its existing approach centered on investor protection, said Madouros.

“While this dimension is critical, the impact of non-bank financial intermediaries is broader than that of their own investors,” said Madouros, adding that shocks could have “implications on the wider economy”.

The UK is also seeking more rapid progress in regulating shadow banking. BoE Governor Andrew Bailey has criticized Brussels for dragging its feet on financial market fund reforms it has approved globally, telling lawmakers in January that while Britain took action, “we need the EU to do it, and they didn’t.” Not yet”.

The European Central Bank, which is responsible for overseeing the largest banks in the eurozone, recently criticized the current regulatory regime for shadow banks as inadequate.

Madouros said Ireland itself faced “relatively limited” harm from its funding sector, but that the central bank had a responsibility to ensure the funds did not jeopardize regional or global financial stability.

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