Shadow Banking in Europe: Idiosyncrasies and Their Implications for Financial Regulation

European Journal of Risk Regulation (2019), 10(4), 781-810

53 Pages Posted: 14 Sep 2017 Last revised: 31 Mar 2020

See all articles by Hossein Nabilou

Hossein Nabilou

University of Amsterdam, Amsterdam Law School; The International Institute for the Unification of Private Law (UNIDROIT)

André Prüm

Universite du Luxembourg; European Banking Institute

Date Written: September 12, 2017

Abstract

This paper studies the specificities of the regulation of shadow banking in the EU. It argues that the idiosyncratic features of the EU shadow banking sector call for a different (or indigenized) regulatory approach from that of the U.S. It highlights striking differences between the EU and the U.S. shadow banking sector based on both the market structure and the legal micro-infrastructure of the shadow banking sector in these two jurisdictions. These different institutional and legal infrastructures of the shadow banking activities, instruments, and entities, as well as the different trajectories of the evolution of development of the banking and the shadow banking sectors in terms of business models, size and composition of actors and transactions can be the driving force behind the differential regulatory treatment of shadow banking in the EU and the U.S.

In highlighting the differences between shadow banking in the EU and the U.S., this paper focuses on the repo markets, securitization and derivatives markets as the main instruments and activities that play significant roles in credit intermediation (maturity and liquidity transformation) outside the regulatory perimeter of the traditional/regular banking system. It then discusses shadow banking entities, especially Money Market Funds (MMFs) as typical shadow banking entities and highlights the fundamental differences in the structure and functioning and existing regulatory treatment of the MMFs in the U.S. and the EU. In the end, the paper underscores the main structural and regulatory differences in the Alternative Investment Fund (AIF) industry across the Atlantic and argues that there is no homogeneous population of such funds and why they need to be treated differentially.

The paper concludes that the market structure, business models, as well as legacy regulatory framework of shadow banking (as well as banking), display substantial differences in the U.S. and the EU. The findings in this paper rally against one-size-fits-all proposals to address the problems of the shadow banking system worldwide and require considerably differentiated regulatory approaches to regulating shadow banking across the Atlantic. Therefore, any adoption of the U.S. regulatory framework for the shadow banking sector by the authorities regulating the European shadow banking sector should be cautiously undertaken.

Keywords: Shadow banking, securities financing transactions, money market funds, securitization, rehypothecation

JEL Classification: F3, G1, G2, G3, K2, N2

Suggested Citation

Nabilou, Hossein and Prum, Andre, Shadow Banking in Europe: Idiosyncrasies and Their Implications for Financial Regulation (September 12, 2017). European Journal of Risk Regulation (2019), 10(4), 781-810, Available at SSRN: https://ssrn.com/abstract=3035831 or http://dx.doi.org/10.2139/ssrn.3035831

Hossein Nabilou (Contact Author)

University of Amsterdam, Amsterdam Law School ( email )

Postbus 15654
1001 ND
Amsterdam, Noord-Holland 1001 ND
Netherlands

HOME PAGE: http://www.uva.nl/profiel/n/a/h.nabilou/h.nabilou.html

The International Institute for the Unification of Private Law (UNIDROIT) ( email )

Via Panisperna 28
Rome, 00184
Italy

Andre Prum

Universite du Luxembourg ( email )

4, rue Alphonse Weicker
Luxembourg, L-2721
Luxembourg
+352 4666446300 (Phone)

HOME PAGE: http://www.uni.lu

European Banking Institute ( email )

Frankfurt
Germany

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