MiFID II / MiFIR - Draft EBA Guidelines on limits on exposures to shadow banking entities

Draft EBA Guidelines on limits on exposures to shadow banking entities which carry out banking activities outside a regulated framework under Article 395 para. 2 Regulation (EU) No. 575/2013

"...The global financial crisis has revealed previously unrecognised fault lines which can transmit risk from the shadow banking system to the regulated banking system, putting the stability of the entire financial system at risk.

From a micro-prudential perspective, shadow banks are generally not subject to prudential regulation (or are not subject to the same standards of prudential regulation as core regulated entities such as institutions), do not provide access to deposit guarantee schemes to investors, and do not have access to central bank liquidity. To the extent that shadow banks carry out bank-like activities, exposures to shadow banks are therefore inherently risky - and thus worthy of specific limits, to be set by institutions as part of their internal processes, for individual exposures

Macro-prudentially, institutions’ exposures to shadow banks could be of concern for different reasons. Here, institutions’ exposures to shadow banks undertaking bank-like activity may lead to regulatory arbitrage concerns, and worries that core banking activity may migrate systematically away from the regulated sector ‘into the shadows’. In order to seek profits, institutions may still actively seek ways to arbitrage the rules by funding risky shadow banks..."

Read the "Draft EBA Guidelines" here. 

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