The IIF has responded to the March European Commission Green Paper on “Shadow Banking”, building on its recently published paper “Shadow Banking: A Forward-Looking Framework for Effective Policy”.

The IIF’s response, produced by its Shadow Banking Advisory Group, welcomes the efforts of the Commission to understand and assess the benefits, potential risks, and where necessary risk mitigation measures in the non-bank financial sector, and its efforts to promote international consistency and coordination.

The IIF response agrees with the need for sound policy. Properly structured, and with risks properly managed, many non-bank financial activities that might separately, or in combination, amount to non-bank credit intermediation can provide significant benefits to investors, borrowers and the wider economy. As the financial crisis demonstrated, however, when the risks from these activities are not managed and mitigated effectively, they have the potential to create substantial and even systemic effects.

The IIF suggests that while the term “shadow banking” can seem attractive, trying to define it in a sufficiently detailed and precise way for the purposes of regulation or legislation is extremely challenging and ultimately unworkable. It argues that a more satisfactory approach would be to focus on individual non-bank financial activities and assess whether they have the potential to create systemic risk, whether this risk is being properly mitigated through existing regulation, transparency and disclosure, and if not, how the particular risks can be most effectively mitigated.

The IIF therefore suggests the Commission should look to develop a number of separate Green Papers or other policy documents on particular non-bank financial activities rather than attempt to produce an all-encompassing policy and regulation covering “shadow banking.”

The IIF also encourages the Commission first to take stock of the extent to which any risks have been addressed or are in the process of being addressed by measures already implemented at the national and international level. The IIF response argues that the Commission should assess whether these changes are likely to be effective, and if necessary, give more time for them to take effect before assessing if there are remaining risks that further regulation would be well-placed to tackle.