Alternative financing & Shadow banking

Alternative financing (sometimes called shadow banking) refers to the provision of credit by financial entities that are not credit institutions. Alternative financing has been identified as one of the key elements in the global regulatory reform post financial crisis, acting as a balance for liquidity demand from the real economy, financing tool for growth and eliminating factor for systemic risk jeopardising the stability of the financial sector as a whole.

The main input from policymakers and regulators in regard of non-bank finance has been issued by the Financial Stability Board (FSB) and the European Commission (EC). Indeed, alternative financing has not traditionally been the prime focus of prudential regulation and supervision. Non-bank finance certainly provides, at least to a certain extent, a valuable alternative to bank funding and supports the real economy activity. Nevertheless, the FSB and the EC consider that alternative financing constitutes also a source of systemic risk to the financial system, especially where it involves bank-like activities such as transforming maturity and liquidity, and creating leverage.

The EC issued a first communication on shadow banking in September 2013 setting out its roadmap to limit the emergence of risks in the shadow banking sector. These risks include a possible contagion through the connection of shadow banking activities with the regular banking system. This communication was adopted as a follow up to a green paper on shadow banking, where stakeholders provided input to a consultation.

The main recommended action points by the EC include the adoption on 30 June 2017 of a regulation for money market funds (MMFs), which are mutual funds that invest in short-term debt such as money market instruments issued by banks, governments or corporations. The regulation on MMFs has entered into force on 20 July 2017, with most of the provisions applying as from 21 July 2018 (with the exception of Articles 11(4), 15(7), 22 and 37(4) applying as from 20 July 2017).

Securities financing transactions (SFTs) another topic identified for policy makers to ensure a better monitoring. SFTs are any transaction in which securities are used as collateral for a cash transaction. SFTs allow market participants to access secured funding and are an essential funding tool in the European Union. In November 2015, the EC adopted a regulation on the transparency of securities financing transactions (SFTR), which applies as from 12 January 2016. These rules add transparency, reporting and disclosure conditions for institutions engaged in SFTs, making it easier to monitor and assess the risks involved in these transactions.

The ABBL has over the course of the last years actively contributed to the various initiatives in the field of alternative financing and shadow banking. As such, the ABBL contributed, in coordination with its members, to the FSB consultation on the green paper on shadow banking, as well as provided comments on the several drafts circulated within the European Parliament in relation to shadow banking initiatives. Furthermore, the ABBL provided full coverage and assistance in the processes leading up to the MMF Regulation as well as SFTR.

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