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EU executive poised to address shadow banking risks

The European Commission has presented draft legislation aimed at taming the multi-trillion-euro shadow banking industry in the 28-member bloc. The idea is to make unregulated money market funds safer.

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The EU executive said the draft law intended to regulate money market funds. One example of this would be to make some operators set aside cash buffers to avoid panic should many investors withdraw their money at once.

Brussels said it aimed to deal with special funds used by big companies to temporarily deposit billions of euros, indicating the 24-billion-euro ($31.6-billion) shadow banking industry in Europe comprised money market institutions and some hedge funds, as well as firms involved in securities lending and repurchase markets.

It said such groups borrowed and lent money just like ordinary banks did, but they often fell outside the remit of regulation.

Possible regulation impact

"We have regulated banks and markets comprehensively," EU financial services chief Michel Barnier (pictured) said in a statement. "We now need to address the risks posed by the shadow banking system", he added, pointing out that unregulated funds had no access to support from central banks if things went wrong.

Barnier's plans draw on a global blueprint that will be submitted for approval to the world's 20 leading economies when their leaders meet in Russia on Thursday and Friday.

Brussels noted its own draft legislation was more ambitious in parts, but individual governments and the bloc's parliament would have the final say on the law.

Some analysts have expressed misgivings about the concept of imposing a 3-percent buffer on some money market funds, saying the requirement would make them unviable as offered rates would no longer be competitive.

hg/kms (Reuters, dpa)