The European Commission published a Green Paper on "Shadow Banking" in order to avoid new sources of risk in the financial sector. According to the Financial Stability Board, the shadow banking system is "the system of credit intermediation that involves entities and activities outside the regular banking system".

To a certain extent, shadow banking performs important functions in the financial system. For example it creates additional sources of funding and offers investors alternatives to bank deposits. But it can also pose potential threats to long-term financial stability because unknown sources of risk accumulate in the financial sector and there are potential spill-over effects from the shadow banking sector to the regular banking sector.
The Green Paper sets out how existing and proposed EU measures already address shadow banking activities. For example, off-balance sheet vehicles, such as Special Purpose Vehicles, are regulated indirectly through banking regulation. Hedge fund managers are regulated directly through the Alternative Investment Fund Managers Directive, which addresses a number of shadow banking issues. Some Member States also have additional national rules for the oversight of financial entities and activities that are not regulated at EU level. Although these measures go some way towards addressing shadow banking entities and activities, there is still further progress to be made given the continually evolving nature of shadow banking and our understanding of it.
The Commission's current work is to examine existing measures carefully and to propose an appropriate approach to ensure comprehensive supervision of the shadow banking system, coupled with an adequate regulatory framework. In this context, there are five key areas relating to banking, asset management, securities lending and repurchase agreements, securitisation, and other shadow banking entities where the Commission is further investigating options and next steps.
Stakeholders are invited to respond to the consultation before 1 June 2012. A conference on shadow banking will take place in Brussels on 27 April 2012.

More information: http://ec.europa.eu/internal_market/bank/shadow_banking/index_en.htm