Stricter limits proposed for bank exposures to shadow banking
The European Banking Authority (EBA) has launched a consultation on revised guidelines to impose stricter limits on banks' exposures to shadow banking entities. The aim is to mitigate risks to financial stability and ensure consistent application of rules under the Capital Requirements Regulation (CRR).
Mitigating hidden risks in financial interconnections
The EBA is mandated under CRR Article 395(2a) to update guidelines on exposures to shadow banking entities (SBEs).
These guidelines set supervisory expectations for institutions to manage and monitor SBE exposures, ensuring risks are properly identified, measured, limited, and controlled.
The global financial crisis highlighted previously unrecognized interconnections that can transmit risks from the shadow banking system to the regulated banking system, putting overall financial stability at risk.
SBEs operate outside regulated frameworks, lack investor safeguards, and do not access central bank liquidity, posing heightened microprudential risks.
Macroprudentially, SBE exposures raise concerns about regulatory arbitrage and the migration of bank-like activities, amplifying risk transmission if not adequately managed.
The guidelines require institutions to establish internal limits on individual and aggregate SBE exposures.
Harmonizing the framework for consistent application
The updated guidelines align their scope and definitions with the CRR and the Commission Delegated Regulation (EU) 2023/2779, which harmonized the criteria for identifying SBEs.
This ensures institutions and supervisors rely on a single set of binding criteria for identification.
The guidelines specify expectations on governance, risk management, and internal limits, while maintaining a fallback approach for exposures when institutions cannot meet principal requirements.
This framework aims for consistent application of large exposure rules across the EU.
Feedback from this consultation will refine the guidelines and inform the EBA's report to the European Commission.
Closing a regulatory loophole
These revised guidelines are a crucial step towards closing long-standing regulatory loopholes in the shadow banking sector.
By harmonizing identification criteria and strengthening exposure limits, the EBA addresses systemic risks that have amplified financial crises in the past.
However, the effectiveness will depend on rigorous implementation and continuous monitoring of evolving non-bank financial intermediation.