The European Commission has proposed new rules for money market funds (MMFs) to develop a more stable financial system by clamping down on shadow banking.
The proposed new rules aims to ensure that MMFs can better withstand redemption pressure in stressed market conditions by enhancing their liquidity profile and stability.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
Financial Stability Board has estimated the size of the shadow banking sector to be around 51trillion in 2011, which represents 25-30% of the total financial system and half the size of bank assets.
The Commission said that MMF’s are important because they provide extra sources of financing for companies and the economy; they can also pose serious threats to long-term financial stability.
MMFs are an essential source of short-term financing for financial institutions, corporate and governments. In Europe, around 22% of short-term debt securities issued by governments or by the corporate sector are held by MMFs. They also hold 38% of short-term debt issued by the banking sector.
The Commission’s new set of rules targets the 1 trillion euro (US$1.3 trillion) money-market fund sector and will require approval from the EU’s member states and the European Parliament.
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataThe proposed rules will require MMFs to have at least 10% of their portfolio in assets that mature within a day and another 20% that mature within a week to guarantee they have sufficient liquidity to pay back investors at any point in time.
Since the start of the financial crisis back in 2007, the EU commission has undertaken a comprehensive reform of the financial services sector in Europe to establish a stable financial sector by addressing the shortcomings and weaknesses highlighted by the crisis.
But risks should not accumulate in the shadow banking sector, as the new rules could be pushing certain banking activities towards this less highly regulated shadow banking sector.
The commission said that the MMFs operation has been at the core of international work on shadow banking due to their interconnectedness with the banking sector.
Under the new rules, MMF’s should be held to a mandatory 3% capital cushion, should be limited to investing in highly liquid assets with maturities as short as one day and to have exposure to each issuer capped at 5%.
Michel Barnier Internal Market and Services Commissioner said: "We have regulated banks and markets comprehensively. 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," Barnier added.
