Shadow Banking Guidelines – Part 1: An Overview

Shadow banking has been a subject of great interest to financial regulators and policy makers since the global financial crisis. A topic of particular focus has been the interconnectedness between the world of unregulated shadow banks and that of regulated banks, and how distress in the former could cause instability in the latter. The interconnectedness could arise, for example, by financial institutions having credit exposure to shadow banks by providing them with leverage.

In the first of our series of updates on the guidelines proposed by the European Banking Authority (EBA) on limits on exposures of EU regulated banks to shadow banks (the Guidelines), we provide an overview of the key areas considered under the Guidelines. This update also considers how the Guidelines could have an impact on the operation of debt funds (perhaps the most ubiquitous form of shadow bank and an increasing force in the credit markets) operating in Europe.