EU may expand capital rules to shadow banking sector

The European Commission is considering applying its banking capital rules to “shadow banking” institutions, according to a draft EU document reportedly seen by Reuters.

Shadow banks are non-bank financial intermediaries like hedge funds and structured investment vehicles that provide credit to the financial sector. The shadow banking industry handles around $60 trillion of transactions every year – roughly the same size as the world economy – but is far less regulated than mainstream banking, and is therefore perceived by some to be a source of systemic risk for taxpayers.

World leaders meeting at the G20 summit on 5 and 6 September are expected to endorse reforms, but stop short of rushing through broad changes because of the liquidity shadow banking provides to the still-vulnerable banking sector.

The document, due to be published next Wednesday, is said to outline possible reforms to expand banking regulation to the sector.