Ireland and Luxembourg are pushing for stricter oversight in the shadow banking sector, which manages roughly half of the world’s financial assets.

Ireland and Luxembourg will require a lot more electricity if they want to illuminate shadow banks more clearly. The Financial Times reported this weekend that the two European nations are requesting stronger international controls for a sector that currently oversees approximately half of the world’s financial assets.

Embracing the Dark Side

Shadow banking has risen substantially in the past decade. Hedge funds, private equity firms, mortgage lenders, and even Goldman Sachs and Morgan Stanley can bank. They were justified by the need to provide business borrowers with more financing options.

“Shadow banks” are excluded from bank regulations and protections. In the FTX crypto collapse last fall, alternative lenders’ opaque financial lines were disclosed as they rapidly increased their financial assets, leverage, and interest rates. Last October, the Bank of England had to buy bonds to stop funds from Ireland and Luxembourg from selling, giving those two nations an unpleasant taste.

Despite the fact that each nation is free to define its own shadow banking regulations, regulators in Ireland and Luxembourg, where the industry oversees almost $10 trillion in assets, are pushing for universal standards:

  • According to the Financial Times, Dublin will require a “overarching, comprehensive” structure. Marco Zwick, Luxembourg’s Commission de Surveillance du Secteur Financier, added, “We have seen that an international crisis cannot be responded to by national initiatives alone; it needs a global response.” Despite the Bank of England and European Central Bank agreeing, global shadow bank regulation has been slow.
  • Moreover the Financial Stability Board, a global organization that oversees the global financial system, advised the G20 in 2015 that the world’s major economies “plug data gaps, remove hurdles to cross-border data sharing, and involve all relevant domestic authorities in assessing shadow banking risks,” according to Reuters.

US transparency is already attacked. Last week, officials expanded Hart-Scott-Rodino antitrust reporting system merger proposal disclosure requirements. Antitrust experts told the Financial Times that the new legislation may target private equity firms, resulting in more acquisition denials. Billable hours will reduce antitrust lawyers’ burden.

Ireland and Luxembourg want more regulation of shadow banking
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