Last Wednesday, the European Commission said that it is undertaking its first program to stop the practice of unregulated financial activity called shadow banking. This is done when special funds by large firms to hide or park billions of Euros in cash away from regulatory authorities.
The new policy would be included in a draft law set to regulate the activiites of money market funds. One of the goals is to make these funds safer for these companies through the creation of cash buffers in order to prevent panic when investors withdraw their investments all at once.
According to EU Financial Services head Michel Barnier, this policy would reduce the risk to the financial system from the sudden changes in the trillion euro sector. Users of the funds though have warned that imposing demands on increasing retained amounts would make the financial service too expensive in the long run.
This policy is just one of the many to be created in order to place shadow banking from being backroom alley deals. This EUR24 trillion industry covers money market funds, a number of hedge funds, securities lending firms and firms in the repurchase markets. These entities lend and borrow money like banks but they are not banks. As such, they are beyond the ambit of many regulations and controls, making them work in the 'shadow' of traditional financial activities.
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