May 18, 2015 / 4:28 PM / 4 years ago

EU watchdog challenged over 'shadow-bank' curbs on lenders

LONDON (Reuters) - Curbing mainstream banking links to “shadow banks” will bolster confidence in the financial system while still allowing funding for the economy, European Union regulators said on Monday.

The 2007-09 financial crisis prompted policymakers to shine a spotlight on the hitherto largely unregulated sector, which creates credit as do banks.

The European Banking Authority (EBA) was responding to criticism that its proposed guidelines to limit banking exposures to shadow banks are too broad to be workable.

It includes securitisation vehicles and alternative funds, a sector industry officials said is now being regulated.

Isabelle Vaillant, the EBA’s director of regulation, said the guidelines will ensure banks hold enough capital to withstand spillovers from problems at shadow banks.

“There is no negative in being in the shadow-banking definition,” Vaillant told a public hearing on the draft guidelines. “We are trying to push for confidence.”

The guidelines are due to take effect around early 2016 when a bank’s exposure to shadow banking should be no more than a quarter of its total capital buffers.

A financial lawyer who attended the hearing said this limit would be quickly breached at many banks given how many assets have moved from now heavily regulated banking to asset managers.

Money market funds, currently in the EBA definition, could be removed once a draft EU law regulating them is approved, EBA officials said.

The definition includes vehicles used by banks for securitised debt, a sector now a priority in EU plans for a capital markets union (CMU) to boost financing for companies as banks rein in lending.

A Deutsche Bank official said including securitisation was at “cross purposes” to the CMU plans.

But Alexander Hodbod, a financial stability expert at the European Central Bank, an EBA member that supervises top euro zone lenders, said the guidelines were not some “huge clampdown” on market based finance.

The sector that can play a “spare tyre” role when banking is under stress, he said.

“You need to have boundaries between the two sides,” Hodbod said, adding that such boundaries mean both sides don’t fail in a crisis.

Hodbod said funds were now getting large amounts of money from banks and he needed convincing as to why some asset managers should be excluded from the EBA definition.

Regulators don’t want to see such large amounts of credit moving from core banking into shadow banking and the 25 percent limit was a relatively light step to cut risk, Hodbod added.

Editing by David Holmes

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