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EU reaches deal to shine a light on "shadow" banking

Wednesday, June 17, 2015 - 20:53
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Financial transactions using shares or other assets to secure credit will come under greater scrutiny after the European Union reached a deal on Wednesday to improve transparency and mitigate risks in the so-called "shadow banking" sector.

[LONDON] Financial transactions using shares or other assets to secure credit will come under greater scrutiny after the European Union reached a deal on Wednesday to improve transparency and mitigate risks in the so-called "shadow banking" sector.

The sector creates credit outside mainstream banking by allowing banks, asset managers, pension funds and others to access secured funding through a temporary exchange of assets as a guarantee for cash.

Figures from the global Financial Stability Board showed that shadow banking grew by US$5 trillion in 2013 to reach $75 trillion.

But the lack of transparency in such transactions has made it difficult to identify who owns the assets and monitor risks.

The European Parliament and EU member states agreed on a final text of a new law on Wednesday to require stricter reporting requirements on securities financing transactions.

All contracts will have to be reported to a trade repository with six already set up in the EU. Investors will also have to be told how their assets are being used.

"These activities are important for the financing of the economy and the right kind of oversight will make it easier to monitor and assess the risks involved," EU financial services chief Jonathan Hill said in a statement.

The deal will be formally rubber-stamped by EU states and the parliament at a later date.

REUTERS