The EU's next step in regulating the financial market: monetary market and hedge funds, which are a high-risk, speculative business. Critics say the Union's measures don't go far enough.
The collapse of the US investment bank Lehman Brothers, which is considered the beginning of the financial crisis, is approaching its fifth anniversary. The EU Commission has taken the past five years to come up with a bill to reign in some of the crisis' main actors in the "shadow banking" sector. In a press release, the Commission said a lack of transparency in the shadow banking sector makes it "difficult to identify property rights (who owns what), monitor risk concentration and identify counterparties."
The so-called shadow banking sector exists parallel to regular banks and consists of investment funds, money administrators and creditors, who currently have hardly any rules to obey. Their existence, however, is legal and provides companies with a variety of long and short-term financing options.
"We have regulated banks and markets comprehensively," EU Commissioner for the European domestic market, Michel Barnier, said in Brussels. "We now need to address the risks posed by the shadow banking system. It plays an important role in financing the real economy and we need to ensure that it is transparent and that the benefits achieved by strengthening certain financial entities and markets are not diminished by the risks moving to less highly regulated sectors."
A multi-trillion-Euro volume
The shadow banking institutions lend money to normal banks or businesses with short notice, and for a few days or weeks. They also offer high interest rates for money that is entrusted to them for a short time. The risk of losing the money is higher than with normal bank transactions. In 2011, shadow banking sector's size is estimated to be 51 trillion euros ($66 trillion), which makes this parallel, largely unsupervised sector, one-third the size of the regular banks' business.
Some participants in the shadow banking sector belong to normal big banks and insurance companies. "Many banks have moved more and more of their business to their shadow banks to evade regulation," Barnier said.
"The shadow banking sector seems multi-layered and opaque, or even obscure, at times. Even though it's highly complex, the national and European regulating authorities need to take appropriate measures now," he said, adding that he wants to regulate the high-risk money market funds first.
Making the risks manageable
The monetary market funds should have to obey rules similar to those regulating normal banks and build up financial cushions, Barnier said. This way, they wouldn't tear down their owners and creditors along with them in case of a crisis. The funds should also have a certain amount of readily-available money on hand to remain liquid.
For Sven Giegold, financial expert of the Green Party in the European Parliament, these measures don't go far enough. "When the asset value of the funds decreases dramatically, in a drastic crisis for example, the funds are forced to sell as fast as possible," he told DW. "That's exactly what happened in the euro crisis, but Michel Barnier and the rest of the European Commission refuse to follow through with the necessary consequences."
Giegold said some of the money market funds with their risky business models be closed. But, he added, the EU Commission has given in to pressure from financial market lobbyists and the governments in Luxembourg and Ireland, which for tax reasons are home to many such funds.
"Michel Barnier doesn't have the courage to take monetary market funds of the market, even though they accelerated the euro crisis," Giegold said. "Instead of forcing these funds to back down, as consultants recommend, he only suggests a 3 percent cushion. With a repeat of the crisis, that wouldn't be enough to stop the monetary market funds that added fuel to the crisis' fire."
A long way to go
So far, the EU Commission has only introduced a bill to regulate the monetary market funds. It will only turn into a law, after the European Parliament and national governments have deliberated and approved it - a process that could likely take years.
Other suggestions to reign in the shadow banking industry currently only exist in position papers or long-term schedules that need to be discussed with the United States and the other G20 states.
"We need to get our European house in order," Barnier said. "We don't want to get rid of shadow banking, we only want to reduce contagiosity and increase transparency."