The regulatory implications of the shadow banking system

Posted on:Dec 14,2017

I. Introduction

Shadow banking systems only have a few years of history, yet they quickly jumped into the centre of attention. Their denomination might sound especially ominous if the outlines of a financial crisis arise on the horizons of stock markets. But why do the institutions of shadow banking systems have such an adverse reputation? In this research the author seeks the answers to these questions, simultaneously with pursuing to create a general definition for the shadow banking system, with keeping in mind the circumstance that the shadow banking systems of developed and developing countries differ greatly from each other, therefore the research takes into consideration the existing differences between the shadow banking systems of the most important financial systems and reviews the related regulatory background as well. Special focus will be placed on the shadow banking systems of the United States, the European Union, furthermore, on the shadow banking systems of developing countries, China in particular. Finally, the expected tendencies of future legal regulations within the topic of shadow banking systems will be the subject of examination, considering the fact that the nature of such regulations can be different with respect to the legislators’ approach in certain economic super regions.

II. Previous attempts to define the shadow banking system

The term shadow bank was first used by a financial expert named Paul McCulley2 during a conference organised by the Federal Reserve.3 He determined the word shadow bank as the group of all non-banking financial institutions that carry out maturity transformations. He defined maturity transformation as a financial intermediary process during which the conversion of usually short-term liabilities to long-term assets occurs.

The phrase shadow bank is an apt metaphor because the financial system created by it casts a shadow on the traditional commercial banking system by offering alternative opportunities, the extent and contours of which cannot be circumscribed precisely.

The first attempt by the author to define the shadow banking system was within the framework of a research prepared for the Hungarian Ministry of Justice.4 The author then applied a general approach by considering the shadow banking system as a special sector of the financial system, to be interpreted in contrast with the conceptual elements of the classical banking system.

According to the author’s previous definition the shadow banking system is the group of financial institutions operating with a mixed, commercial5 and investment6 bank-related service portfolio, the operational structure of which does not separate the processes and results of the two classical banking activities, but rather connects them by way of cross-financing. From the classical commercial banking activities the ones that do not require separate licensing and a special security are included in this service portfolio. Capital allocation usually occurs by issuing securities, but in any case not by collecting deposits, therefore in the event of credit transformation relationships7 the raising of capital, the placing of assets and the return on investments all occur by way of investment activities.

In the above-mentioned research the author defined the shadow banking system as a) a segment of the financial system which gained significance recently and one that b) provides alternative commercial banking services c) by connecting savings- and credit relationships d) through the transformation of atipical assets e) within a framework that was not regulated before at the institutional system level.

In essence the international financial organisations dealing with the topic have come to the same conclusion. For example, the Financial Stability Board (FSB)8 defined the shadow banking system in connection with the 2007 crash of the United States secondary mortgage market. According to their definition the shadow banking system is a credit-transformation system consisting of market actors and their activities falling outside the regular banking system. Furthermore, the FSB also defined the participants of the shadow banking system with respect to their material and substantial characteristics.

From the substantial point of view these participants are financial institutions engaging in the following activities:

  • Deposit-related collection
  • Maturity and/or liquidity transformation 9
  • Credit risk transfer 10
  • Use of direct or indirect leverage

From the material point of view the FSB defined it by detailing the activities of the financial institutions specified from the substantial point of view. It mentions this as a type of financing granted for non-bank legal entities typically. It specifies three types of financing in detail:

  • Issuing securities
  • Lending securities
  • The use of securities repurchase agreements (repo transactions).11

These transactions undoubtedly play an important role in the functioning of the shadow banking system, however, their implementation has an assigned target with respect to capital allocation and transformation. Behind the focus of the FSB’s examination was the idea according to which it wished to project its definition on every market actor that might pose systemic risk as a result of its operations.12

In this regard it created a non-complete list of legal entities it wished to subject to its examination and regulations. According to the list the following are included in the group of such legal entities:

  • Special purpose entities carrying out maturity and/or liquidity transformation (SPE13 and ABCP);14
  • Money market funds and investment funds carrying out deposit-type funding that entail strong redemption risk;
  • Investment funds providing loan and/or using leverage (including the category of ETF as well);15
  • Financial institutions providing loan or loan guarantee, or carrying out liquidity and/or maturity transformation without banking licenses;
  • Insurance or reinsurance16 companies issuing credit products or providing guarantee.

In summary we can conclude that in its examination the FSB, even if it carried it out in a difficult manner, but circumscribed the group of legal entities participating in the shadow banking system and posing significant systemic risk to the financial economy.

III. The extended definition of the shadow banking system

On the basis of the above the question arises whether the shadow banking system is able to generate money17 like the traditional banking system. The answer is definitely yes, and the method for this is called securitisation. Prior to the 2007-2009 financial crisis the investment banking activities, unlike commercial banking activities, were subject to softer rules with respect to capital requirement. Therefore, when they started to issue in large quantities certain structured assets, like derivatives transactions,18 they had the option to rely on any market asset, thus they were able to create sources more cheaply than the commercial banks, whose costs were increased by their necessary fulfilment of the capital requirement. With such transactions they acquired unsecured income19, or simply put, they had access to freely usable sources.20 I.e. if generating money occurs in the form of derivatives and on non-regulated markets, its effective cost is indeed close to zero. A perfect example of this is the activities of the investment bank Lehman Brothers prior to its downfall in 2008,21 when it issued four thousand different securities with the help of seventy-five SPEs and trusts22, in the absence of any capital and without providing any other coverage.23 Why could this method of generating money next to low costs be a danger to the financial system? On the one hand it is a danger because, with respect to the amount of money generated, the authority monitoring the given market lacks the necessary information to adopt sound decisions, which is a reason of the non-transparent nature of this method. On the other hand, the amount of money generated by this method might create an asset bubble24, and might very well be the subject of further speculations. The systemising effect of further speculations might increase the volatility of the market due to the typically high leverage, just as it happened between 2007 and 2009.

Therefore, it would be wise to extend the author’s previously described definition of the shadow banking system with two additional points, in accordance with the following:25 … f) during its activities it could be able to generate money as well, g) and in such event it might further increase the risks of the financial system and lower the efficiency of the monitoring organs’ interventions.

IV. Comparison of important and operating shadow banking systems

According to the extended definition, the operations of numerous shadow banking systems can be detected across the world. In recent years the shadow banking systems of the United States and China were debated the most by professionals and the public. The reason of this is the prominent role these countries played in the 2007-2009 financial crisis, because the share their respective shadow banking systems represented in the financial system went beyond the economic framework. However, it is worth examining these two countries from a broader point of view, as the dominant entities of the groups of developed (USA) and developing (China) countries. In the author’s opinion the dissonant (universal) ways of how banking systems operate26 in Europe is a further reason with respect to the operations of shadow banking systems.

A) The characteristics of the shadow banking systems of developing markets

About developing markets in general

There is an important difference between the shadow banking systems of developing markets and the shadow banking systems of countries having developed money and capital markets: there are less information available in connection with the shadow banking systems of developing countries, and the available information is non-comprehensive. However, the presumption seems to be correct, according to which in the case of these groups of countries the proportion of the shadow banking system compared to the balance sheet of the whole financial system does not exceed 39%.27 Furthermore, in the case of developed countries, the over-regulation of certain elements of the traditional banking system might result in regulatory arbitrage28, which diverts the product innovation that serves financial needs into softer, less-regulated areas. Simultaneously, as a reason of the deficiencies of the regulations or as a consequence of the lack of regulations in the case of developing countries, such solutions of transformation occur within the shadow banking system. On the other hand, tipically in developing countries, mainly as a reason of more detailed regulations and a greater history with respect to money and capital markets, the transformation processes are more complex and less transparent within the shadow banking system, while in developing markets the newly emerging financial innovations cover less-regulated areas.

The characteristics of the Chinese shadow banking system

The development and operation of the Chinese shadow banking system well exemplifies the above. In 2013 the State Council of China, i.e. the Chinese government, accepted the definition of the shadow banking system in accordance with international standards. Accordingly, the shadow banking system is credit transformation occurring outside the traditional banking system. Even so, the Chinese shadow banking system came into existence from the interactions between and as a consequence of financial innovations and the traditional banking system. In 2014 the Chinese government, by approaching it from the viewpoint of regulations, divided the shadow banking system into three main groups.29 In the first group we can find the financial activities which fall outside the scope of regulations. Internet-based forms of financing,30 direct financing, so-called P2P31 systems and underground banks belong to this group.32 The second group contains the organisations which operate without license and in a less-regulated environment. Guarantor companies, mortgage credit institutions and companies offering small-scale loans belong to this group. In the third segment of the shadow banking system we can find the financial institutions which are operating in a lawful manner but wishing to avoid the regulations. The most typical products of these financial institutions are certain wealth-management products (WMPs),33 through the sale of which they wish to avoid regulations.

In order to define the Chinese shadow banking system it is important to evaluate its magnitude and specify its main participants.34 However, evaluating the magnitude of the shadow banking system is a similarly difficult task as it was to create its definition. It is not surprising that certain publicised information differ greatly in terms of statistics. In 2012 and on the basis of year-end data, the analysts of the Chinese Academy of Social Sciences35 estimated the size of the shadow banking system compared to the GDP, and found that it amounts to 40% of the GDP.36 According to academics the shadow banking system nowadays amounts to 20,5 billion CNY compared to the yearly GDP of 50 billion. According to official information disclosed by the government37 the shadow banking system was only 14.6 billion CNY, which is only 29% of the GDP in a given year. However, with respect to credit rating agencies, Flitch Ratings, the smaller brother of Moody’s and Standard & Poor’s, estimated the size of the Chinese shadow banking system in the same year, and found that its 198% of the GDP. The financial sector of the shadow banking system grew dinamically from 2010, with an annual increase above 30%38, that lasted until 2014.39

China is particularly characterised by the above mentioned phenomenon of regulatory arbitrage. In the event of regulatory arbitrage the economic actors try to conduct their activities in areas that are less-strictly regulated or unregulated. This can manifest for example in a choice made with respect to company form, or in the specification of the scope of activities. Next to China, regulatory arbitrage can be detected in the United States as well. However, in Europe it has less significance. Basically, regulatory arbitrage can occur in two situations: if the regulations are very strict, or if due to the undevelopment of the market certain issues avoid the attention of the regulatory authority. While in the United States mainly the first situation can be seen, in China both can be detected simultaneously.

In the case of commercial banks, similarly to the United States, the strict regulation of deposit interest rates in China exemplifies the most the situation in which the excessive regulation finds on a less-free capital market the new and innovative opportunities in the shadow banking system in order to satisfy the demands of the market.

In the United States Regulation Q, an important provisions of the 1933 Banking Act40, determined an interest rate ceiling, thus established an ideal market environment for the formation of money market funds by 1971.41 In China, the regulatory environment established by the 3% limited interest rate ceiling42 also served as a basis for the wide spread of so-called wealth-management products – WMPs.43 WMPs in the Chinese economy are a certain form of savings, tipically for a term less then one year, which are serving similar market demands as money market funds in the United States. The banks only undertake the 37%44 of savings products as guarantee for the promissory notes issued in connection with WMPs, and for the remaining part the WMPs have no institutional and financial guarantee, as well as no guarantee framework of investor protection or a central bank. However, the Chinese government45 intervened so far in cases of non-payment, for example in 2012 in the case of Huaxia Bank Co. and Citic Trust Co.46, in order to protect investors and the market. Therefore, behind all WMPs and similar savings products – just like behind deposits – the investors presuppose a certain verbal central bank guarantee.

It is necessary to point out that in China no deposit guarantee and / or investor protection system exists,47 however, in 2013 the Chinese central bank mentioned among its top priorities the establishment of a deposit guarantee system.48 Along with this, until 2015, the state compensated the investors if a bank collapsed.49

Going back to the effects of regulatory arbitrage in China, we have to shed light on the special features of the Chinese shadow banking system and the operational framework allowed by the economic characteristics. On the one hand, the Chinese government regulated commercial banking activities strictly, on the other hand the demand for capital in the economy increased exponentially next to an annual economic growth of 8-10%. The central allocation of funds,50 even if market principles were taken into considetation, basically focused only on spectacularly supporting huge investments, like the Beijing Olympic Games, developments in the military industry, large-scale environment-shaping and energetic investments, furthermore, foreign investments facilitating external economic expansion. Simultaneously, less funds were allocated to the development of domestic micro, small and medium enterprises, which nonetheless grew dinamically and required a significant amount of funds for this development. Due to this strict regulatory environment, just like in the United States or Europe, however, driven by a different motive but with the same vehemence, the banking system pursued to create alternative funding opportunities. The difference was that while in the United States or Europe the banking system provided credit mainly to satisfy the needs of the population for consumer and stock market (or derivative) investment demands, in China real economy investments were financed.

With respect to allocation51, differences were also noticeable between Chinese and Western thinking. While the Chinese and European shadow banking systems directed and transformed the savings of the entire population through the same channels, the frameworks of the Chinese shadow banking system – through the expanding scale of WMPs – offered more opportunities for large investors. Retail investors in China had access to a narrower group of savings opportunities only, just like hedge funds52 in the United States were only available for wealthier clients prior to the 2007-2009 financial crisis.

At the same time, the role of trust companies within the Chinese shadow banking system grew dinamically. However, in order to understand the operations of such company forms it is also necessary to understand the circumstances of how they were formed. The regulatory background related to commercial banking activities in China stimulated the growth of such company forms with respect to two areas. One of these two areas is the determination of the maximum amount of deposit and credit interest rates. The other area embodies restrictions made by regulatory authorities. Due to this restriction the conversion of on-balance-sheet – i.e. subsidiary – trust companies to off-balance-sheet items could only occur if the banks, due to the requirement of increasing their reserves, rather just sold the savings products, the WMPs of former subsidiaries as agents.

Following the maximisation of deposit and credit interest rates, up to the point of abolishing the maximum rate of credit interest, the restriction on deposit interests was maintained permanently, however, it became more and more free53, and derogated from the maximum rate of credit interest positively, while creating a rising scale (first increasing to 110% of benchmark deposit rate in 2012, then to 120% from 2014).54 Thus the market compelled the creation of alternative forms of savings, since it considered the presence of products offering higher returs than this for satisfying savings demands.

There are clear similarities with money market funds spreading in the United States from 1971, since in case of various types of WMPs we also see short-term investment forms. The next important similarity is that WMPs, typically offering 5% return, became the competitor and alternative of deposits that ensure an interest rate ceiling of 3-3,6%. Compared to zero interest (due to the restrictions on interests established by Regulation Q), the money market funds in the United States could ensure benefit with their return rates of 1% or more and thus become competitive compared to demand deposits.

The Chinese history of regulating WMPs highlights again the impact of the nature of the regulation on the functioning of the shadow banking system. Due to the effects of the 2007-2009 financial crisis the Chinese central bank launched a significant credit-increase program for state-owned commercial banks with the help of the so-called window guidance55. The credit activities stimulated this was had to be reduced heavily in 2011, since the mandaroy rate of reserves, by being increased twelve times in 18 months, reached an equity level of 21,5%. The increasing inflation of deposits, next to an interest rate of 3%, resulted in negative real interest rates.56 This environment provided fertile soil for the advance of WMPs with respect to credits as well, since this way, next to issuing credits, the demand for credit on the market made the investments of sold WMPs subject to issuance as credit. The sector of micro, small and medium enterprises had less and less access to the excessively expensive credit opportunities offerd by the traditional banking system, which exists next to low lending volume anyhow.57 However, the micro, small and medium enterprises were happy to borrow credit from the funds of WMPs. This intermediary form appeared on the level of large companies as well, in the form of entrusted loans58, during which the parent company provides loan to the subsidiary with the interpolation of the representatives of the traditional banking system. In such an event, however, the intermediary institution takes funds over from the parent company nominally only, and only issues it in the same manner, as its own credit. Therefore, similarly to WMPs and due to over-regulation, in such events the bank acts as an agent, more precisely as an intermediary.

B) The shadow banking systems of developed countries

The shadow banking system of the United States

In the United States the shadow banking system came into existence due to the effects of three main factors. On the one hand, the state restricting commercial banking activities with measures of economic policies contributed to this. On the other hand, the strengthening of deregulation processes contributed greaty as well, due to the effects of which a significant financial innovation process has begun, which also contributed to the rise of the shadow banking system in the United States.

During the 20th century in the United States the separation of commercial and investment banking activities was always on the agenda. The first step was taken following the 1929-33 financial crisis, due to which the regulation entirely separated commercial and investment banks.

Based on the 1933 Universal Banking Act, commonly known as the Glass-Steagall Act59, the commercial banks had to sell their departments engaged in investment banking activities. The act set forth that federal banks – with the exception of government securities – shall not engage in commercial activities related to securities, just like it was forbidden for state banks as well. However, if a commercial bank decides that it wishes to engage in the trade of securities, then it was no longer entitled to deposit collection. Another important regulation was introduced by the act, the already mentioned Regulation Q.60 According to this regulation, commercial banks shall not pay interest after the current account balance – i.e. the demandable account – of retail and corporate clients. Apart from this, also within the framework of the regulation, an interest rate ceiling was established which determined the maximum amount of deposit loans that can be issued during commercial banking activities with respect to deposits and other types of bank deposit-like savings. The purpose was to restrict the excessive competition between banks regarding profit, and simultaneously to keep credit interest rates at a low level. Low credit interest rates can produce significantly positive effects with respect to the growth of a given economic system by stimulating the increase of demand for credit. However, if it would have been possible to initiate the competition of interests on the level of deposit interests and in an environment of low interest rates, then the effects of this process would have also increased credit interests within a short period of time.

Senator Glass, after whom the act was named, proposed the amendment of the act already after two years of its entry into force. However, his attempt was unsuccessful, and the strict separation of commercial and investment banking activities only started soften as of 1963. From that point in time it was also allowed for commercial banks to manage the commingled accounts of private clients, in which they could keep record of their purchased securities or bonds and the clients had the chance to trade with municipal bonds as well.

From the 1970s the neoliberal economic policy gained more and more ground among the leading actors of economic control in the United States.61 The ideology fundamentally determining deregulation first appeared at the time of Ronald W. Reagen’s presidential term. The neoliberal approach reached back to Adam Smith’s metaphor, according to which the market economy is controlled perfectly by an invisible hand, thus the market is capable of absolute self-regulation. The neoliberal economic wave also based its argument on this, emphasising that there is a need to have less regulations. This resulted in an intense deregulatory period in the legislation of the United States in the next 20-25 years. The process remained undiminished until the spread of the 2007-2009 financial crisis. George H. Bush, Bill Clinton és George W. Bush all contributred greatly to this, however, the central figure was Alan Greenspan, the former president of the FED.

However, the permanent symptoms of crisis in the capital market since 2002 shed a different light on the phenomenon of deregulation, and subject it to serious criticism as well. Following the regulatory waves of 2008-201062 the Unitesd States – contrary to China – tried to limit the shadow banking system’s room for maneuver. However, these restrictions cannot be deemed as significant, taking into consideration that the previous deregulatory policies, lasting for more than fifty years, had abolished numerous guarantee limits with respect to the functioning of the banking system.

The European shadow banking system

The European shadow banking system, similarly to the European Union, shows a plurality of faces. Within the financial system the share of the shadow banking system is lower than in the United States.63 However, this average amount of 30 % varies considerably.64 For example in the Netherlands this amount is 45%, while in the United Kingdom it is 20%. Characteristically, the shadow banking system in the European Union developed in a strong relationship with the traditional banking system, since the universal banking system offerred new opportunities to traditional banks for collecting deposits with the support of credit issuance and in the form of securitisation, money market funds and securities.

The significant exposure of European banks during the 2007-2009 financial crisis highlighted a previously less-known characteristic of the European banking system. The big European banks have collected cheap resources65 through their money market funds in the United States, a significant part of which were placed in securitised mortgage-market assets by their New York and London offices, with the purpose of achieving higher returns. The consequence of this was that liquidity problems had to be dealt with because of money market funds, simultaneously with suffering significant capital losses with respect to securities covered by toxic mortgage market assets. An interesting difference between Europe and the United States is that while in the USA the degree of securitisation radically decreased in one year, i.e. until 2008 (to USD 400 billion, which is the one-fifth of the previous year’s result), in Europe, up to 2010, however from a lower base rate, but still the number of freshly issues securities portfolios covered mortgage have grown continously. This process was spearheaded by the United Kingdom, the Netherlands, Spain and Italy. In these countries the growth of the real estate market was partially stimulated by this securitisation process, the effects of which – exerted when the mortgage market collapsed – still have an impact on the banking systems concerned.66 In the case of Europe it can clearly be established that the expansion of the shadow banking system was determined by a regulatory arbitrage which used securitisation to avoid the forming of reserves, thus with achieving a more attractive yield in ensured higher return for the shareholders of the traditional banking system.67 This is indeed contrary to the expansion of the shadow banking system emerging from the regulation of deposit and credit interest rates, which is a characteristic from the beginning of the 2000s up to today in the case of the United States and developing markets, especially China.

V. Regulatory responses to shadow banking systems following the 2007-2009 financial crisis

From the perspective of legal regulations, the lessons learned from the 1998 Russian stock market crash warned the legislators and authorities for the first time that the regulations and supervisory systems are inadequate to ensure the efficient, safe and long-term functioning of the financial system. Mainly in the United States, but also in France for example (between 1980 and 2008)68, prior to 1998 the actors of the money market witnessed a deregulation process lasting for almost forty years, during which the legal instruments providing guarante have disappeared from the financial and stock market regulations.

A) The United States

In the United States the 2007-2009 secondary mortgage market crisis highlighted the deficiencies of three main regulatory areas.

One of these was the re-thinking of regulations dealing with the functioning of hedge funds, the financial institutions forming a part of the shadow banking system.69 In their case the guarantee of transparent functioning became a main objective for the purpose of investor protection. An important point of intervention was the reduction of the potential systemic risk of hedge funds by rendering most of the aspects of their functioning under the oversight of regulatory authorities. The purpose of this is that the supervisory organs can have the necessary information with respect to risks covering the whole financial system, and they have this information at the time it is generated, thus they are able to intervene as soon as possible. The basis of this is the idea that preventing the crisis requires less economic and social costs, as before the noticed problems would turn into a crisis it can be prevented with the involvement, at the sectoral level, and at the expense of the actors of the given sector.70

The second important regulatory area, also forming a part of the shadow banking system, was the subjecting of OTC derivatives transactions under the supervisory authority of the Commodities Trading Futures Commission – CFTC.71 The CFTC, during the monitoring of exchange-traded derivatives, gained quite the experience in discovering and dealing with market anomalies in its powers. The stock exchange trading and maintaining rules ensure quick opportunities for increasing equity guarantee items, next to an increase in trade risks, simultaneously with increasing market volatility. This opportunity does not exclude the possibility of the downfall of certain market actors, but decreases the risk of spreading losses and thus systemic risk as well.72

The third regulatory area which stands close to the shadow banking system is the regulation of excessively swollen financial institutions.73 Richard W. Fisher, the president of the Federal Reserve Bank of Dallas, brought the attention again in his speech held on 8 March 2013 to this regulatory deficiency. He came up with the surprising recommendation that the financial institutions that grew too big should be parcelled out, furthermore, he also made it subject to consideration whether these financial institutions should be deprived of the deposit protection system of the FDIC74 and the support of the FED providing temporary liquidity.75 On the basis of the recommendation the financial institutions would have been required to communicate the lack of these protective elements towards their clients. This speech, which could be deemed as an outburst rather than a professionally grounded recommendation, was preceeded by the speech of the acting chief prosecutor, Eric Holder, held before the United States Senate Committee on the Judiciary. In his speech he actually stated that the leaders of the biggest financial conglomerates enjoy de facto immunity from prosecutorial investigation in the United States, since the number of such prosecutorial investigations have declined to a minimum last seen twenty years ago.76

However, on 20 July 2010 the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)77 entered into force, the express objective of which was to avoid interventions funded from taxpayers’ money. Thus it can be clearly stated that the legislator was unsuccessful in reaching its objectives.78 The big financial institutions were still able to abuse their power, maintaining moral hazard79 with respect to the entire financial system. In the course of their risk managemenet and business strategies they continued to undertake additional risk, enjoying the comfortable position that due to their weight in the financial system the FED – and if necedssary, other central banks as well – will be in a hurry to help them out.

There are only four areas where the reduction of this attitude is possible. The most radical solution is parcelling out the extremely big banks, in accordance with the above-mentioned idea of the president of the Federal Reserve Bank of Texas; the other is the reductions of risks through stricter regulations; the third is the imposition of a special tax for covering the damage and costs; and finally, the strictening and extending of supervisory monitoring activities.

The downfall of big financial institutions would exert critical effects to the entire financial system because the volume of their assets can amount to the 50% of the country’s GDP. If certain national economies become indebted to an extent reaching or surpassing the annual GDP then the downfall of big financial institutions can be especially dangerous, since a country’s debt exceeding 100% of the GDP can be reduced to 50% very slowly. Therefore, with respect to these financial institutions, a separate deposit guarantee system or the candidate tax would be the adequate solution.

With respect to regulating risk factors an important result was that the Dodd–Frank Act was able to significantly decrease leverage, to the 50% of previous levels. The restriction established by the legislator with respect to proprietary trading80 within the sphere of commercial banking activities was also welcomed, as in the event of proprietary trading the losses suffered during the transactions placed a direct burden on the bank, devouring a part of the equity providing guarantee for deposits and non-performing loans. In contrast, the bank is always entitled to the dividend after the transactions carried out on behalf of the clients, and the possible risk of losses is a burden on the savings of clients.

B) Tendencies of legal regulations in Europe

Following the 2007-2009 global financial crisis, at the 2010 Seoul conference of the G-2081 a process was started, in the framework of which the Financial Stability Board (FSB), the body representing the financial authorities and central banks of the most developed countries, was requested to conduct an all-around examination of the shadow banking system, and to provide recommendations on necessary regulatory measures. This board had made recommendations in connection with the strenghtening of regulations related to the shadow banking system in its report published on 27 October 2011.

Based on the recommendation of the FSB accepted in November 2015, as of 1 January 2019 the thirty biggest financial institutions in the world will have to comply with a new regulation.82 According to the recommendation, until the beginning of 201983 they have to increase to 16%, and then after a year to 18% the amount of assets capable of bail-in84 in proportion to risk-weighted assets. This involvement of nearly USD 1,2 billion capital85 typically occurs in the form of issuance of bonds, after which the non-payment of interests will not qualify as an event of bankruptcy. As a result of this the inner capital consolidation of financial institutions will occur, since during the conversion of bonds the raising of capital takes place automatically, without the involvement of external sources. By this they expect in the Unites States and the European Union that no state intervention will be needed in the future. While prior to the 2007-2009 financial crisis state interventions – meaning primarily central bank interventions – were typical, following the crisis the new regulatory proposals would place the obligation of absorbing the losses on shareholders and bondholders. With the creation of a multi-level and prudent safety net and by increasing equity requirements, and also with activities of limited-level risk, the legislators wish to minimalise the role of states and central banks worldwide.

However, this process might have adverse effects as well, since with it the bond funds would also step up as potential initiators of bank panics86 and could become systemic risk, as the highlighted elements of the shadow banking system,87 directly next to money market funds.

The European Union, in its Directive 2009/111/EC (III. Directive on capital requirement), determined direct regulations – through the regulation of banks and insurance companies – with respect to shadow banking activities. Within this the EU took preventive steps in order to disable financial institutions (banks and insurance companies) to be able to avoid the already existing regulation on capital requirement during issuance. Thus the directive ultimately determined that issuing securities can only amount up the specified ratio of equity, in connection with which the financial institutions have to provide guarantee in the form of additional asset elements. Simultaneously, the directive also expanded the scope of already existing prudential rules to the institutions of the shadow banking system.

Finally, an important element European lesiglation is the Alternative Investment Fund Managers Directive (AIFM Directive). The directive sets forth that trust companies have to pay attention to liquidity risks permanently and simultaneously operate a liquidity management system.

The AIFM Directive determined new objectives88 with respect to the sector of alternative investment funds. The first and most important is the management of macroprudential risks.89 The macroprudential approach pursues to decrease systemic risk in a given sub-sector of the financial system by setting forth regulations obliging the actors of the sub-sector concerned in order to prevent a possible cross-sector spread. Therefore, the objective of the new regulation is to prevent the occurrence of macro-level risk,90 by means of coordinated data collection.91 Subsequently, the prudential authorities92 process the collected data within the framework of a cross-border cooperation.93

On the other hand, the management of microprudential risks occurring on the level of service providers and their services is important as well. The management of microprudential risks94 was important in the European Union because there were no adequate supervisory requirements for the risk management practices and procedural rules of alternative investment funds.95 However, the deficiencies in the practice of risk management96 pose a threat to investors and contracting partners, and also to the entire market. A consistent regulation can decrease the risk of investors and contracting partners in market sectors where the risk exceeds the average market risk, while a cross-border regulation can decrease the possibility of taking advantage of differencies between supervisory authorities (regulatory arbitrage).


The most important lesson learned in connection with the rise of the shadow banking system is that an excessively strict regulatory environment – narrowing the scope of commercial banking activities – can be a stimulating force for the long-term expansion of the shadow banking system. However, the same is true with respect to market sectors that are not regulated sufficiently, perhaps due to the effects of deregulation, just like in the United States. It is clearly visible that the phenomenon of regulatory arbitrage might not give birth to new financial assets only, but it is also capable of making the harmonisation of such assets and central, monetary assets more difficult due to the lack of information. However, the biggest risk is still that element of the shadow banking system which triggers effects that surpass the limits of its own sector and therefore systematically risk the entire financial system. From this perspective, the new regulation of money market funds in the United States can be detrimental, according to which the funds have to meet increased requirements with respect to capital and liquidity.97 By this, in the event of a significant decrease in liquidity, the money market funds will neither be able to pump additional liquidity into the financial system, but rather to the contrary, in order to meet their liquidity requirements they might increase liquidity problems on the short run.

Furthermore, the legislators and supervisory organs have to prepare for two additional and important changes as well. The first is the merger of the deposit collection and lending (P2P) activities of the sector providing technology-based financial services (FinTech)98 with certain elements of the traditional banking system, and later on with the shadow banking system. The other risk is the ratification of the Transatlantic Trade and Investment Partnership – TTIP by the United States and the European Union, since in case of its ratification – if it will be accepted in its recent form – the promising achievements of the United States in the regulatory process following the financial crisis might be lost, by which the risks known as the prelude of the 2007-2009 financial crisis can appear again.

The different nature of the regulations in certain countries and super-regions can in itself pose a threat. This phenomenon can strengthen the nature of the shadow banking system with respect to regulatory arbitrage in the case of financial system functioning in excessively strict regulatory environments.

Finally, the first and most fundamental question of the research has to be answered: will the negative connotation of the shadow banking system maintain permanently? On the one hand, new and emerging danger zones might be detected as institutions of the shadow banking system, on the other hand, eliminating certain dangers of the shadow banking system might give rise to new dangers due to the internal points of contact and the complex nature of the system. Therefore, the shadow banking system still casts an ominous shadow on the traditional banking system. The viewpoints suggesting that with its alternative solutions and dinamism the shadow banking system is the renewal of the traditional banking system, and that it increases its liquidity, seem to promise little success.


11 „ Supported BY the ÚNKP-17-IV-4. New National Excellence Program of the Ministry of Human Capacities”
12 Paul McCulley (1957-), keynesian economist, acquired his MBA degree at the Columbia Business School in the United States. Subsequently, between 1996-1998, he was chief economist at the investment bank UBS Warburg. From 1999 to 2010, he was the CEO of PIMCO (Pacific Investment Management Company LLC), one of the biggest global asset management companies, with an amount of USD 1.5 billion of invested assets. Following his retirement in 2010, he joined the research center Global Interdependence Center.
13 The Federal Reserve (FED), or otherwise known as the Federal Reserved System is the central bank of the United States of America. It was established by the Federal Reserve Act on December 23, 1913, following a series of bank panics taking place in 1907. According to the provisions of this act in the course of its operation the FED has three main objectives: exchange rate stability, the reduction of long-term interest rates and the maximisation of employment.
14 See KECSKÉS András: Európai jogi szabályozás és annak magyarországi implementációja a pénzügyi intézményeket érintô új kihívások területén. In: Az Uniós jog és a magyar jogrendszer viszonya. Szerk.: Tilk Péter, Pécsi Tudományegyetem Állam- és Jogtudományi Kar, Pécs, 2016, pages 334-336.
15 Commercial banks usually carry out account management, deposit collection and credit activities for their municipal, corporate and retail clients. In the course of such activities the commercial banks are protected at client level by deposit guarantee schemes up to a specified amount with respect to the deposits they manage. The financial institution is supervised by the monetary authority. In the event of a bank panic the monetary authority is able to prevent the development of systemic risk by providing additional liquidity.
16 The operations of investment banks include activities aimed at augmenting the deposits of financially strong private clients and institutional investors in the form of agency or trust management relationships, as well as advisory and underwriting guarantee activities in stock market transactions (acquisitions, public offerings), and also the management of a company’s own capital carried out in the framework of so-called own-account services.
17 Credit transformation processes means the group of financial transactions during which usually the short-term (less than one year) savings are transformed into long-term loans (primarily mortgage loans provided to private individuals or investment loans granted for companies) or securities (purchase of government bonds, investment in shares). During the transmission the characteristics related to both the liquidity and maturity change. The biggest risk is when the depositors terminate their deposit due to a panic and wish to get in the form of cash. However, due to high cash-handling costs and other business-related factors these are not available immediately, which can increase the panic. In the absence of an appropriate central bank safety net this might result in the bankruptcy of the financial institution.
18 The Financial Stability Board – FSB was established in 2009 as the successor organisation of the Financial Stability Forum –­ FSF. The organisation has its seat in the Swiss city of Basel. It was established by the ministers of finance and the presidents of the central banks of the seven most developed countries (G-7), at the proposal of Hans Tietmeyer, the president of the predecessor organisation, the German central bank, i.e. the Bundesbank. The main purpose of the Financial Stability Board is to reach financial stability in the twenty most developed countries (G-20), with the involvement of the financial leaders and the leaders of the monetary authorities of the participating countries. The organisation wishes to achieve the above purpose by harmonising and coordinating the activities of organisations creating international standards and the national financial authorities, furthermore by regulating the financial sector.
19 For more details see footnote 7.
10 In the course of credit risk transfer the original creditor, for example the commercial bank, may transfer the risk of the debtor’s non-payment to the new owner of the credit, typically to the owner of the mortgage-backed security, since the mortgage-backed security embodies all rights and obligations arising from the mortgage loan which serves as its coverage.
11 During repo transactions (repurchase agreement) the investment service provider grants to another market actor credit-type financing with security coverage.
12 See SCHWARCZ, Steven, L.: Lawyers in the Shadows: the Transactional Lawyer in the World of Shadow Banking 63 Am. U. L. Rev. 157 2013-2014 page 160.
13 A special purpose entity or a special purpose vehicle is a legal person created for a predefined goal by a company for achieving its original goal indirectly through the SPE. The special goal is is normally related to investments, a hedges, or securities transactions, such as handling the assets of an enterprise group, issuing securities, or total swaps.
14 An asset-backed commercial paper – ABCP is a kind of securities which takes advantage of the short maturity, high liquidity and the excellent rating of commercial papers. However, this form of securities is backed by less liquid instruments with longer maturity which the issuer markets the same way as unsecured commercial papers issued by seasoned corporations
15 An exchange-traded fund – ETF is a kind of fund which follows the movements of a money market or a stock market instrument either by directly investing into it, or by derivative transactions. This ensures the quick and accurate tracking of market movements – such as the intra-day exchange rate on stock markets.
16 A reinsurer undertakes risks of insurers in the emergence of losses in exchange for a fee. The aim of the insurer is to mitigate risks. It may be achieved in two ways: either by reducing the payout ratio of the damages at the expense of their equity and loss reserve, or by preventing the insolvency arising from outstanding claims from natural disasters. The reinsurer with a properly diverse portfolio and a low loss ratio may increase its profits from the fees collected.
17 The banking system creates money – thus, new financial resources– in the economy by the commercial banks placing smaller percentage of the deposits they handle mainly at central banks. The rest of the deposited amount may be placed as credit. Thus, the same resource may serve both as a deposit and a credit which is a kind of multiplicator effect in the economy.
18 During derivative transactions an investor buys an instrument which price is determined by the price of the underlying product. Therefore, the price fluctuation of the underlying product affects the price of the derivatives too. If the derivative transaction is leveraged, then the price of the derivative may vary by multiples of the underlying product.
19 For commercial banks the capital requirements are much higher for obtaining a licence than for investment banks. In the case of certain saving products, the placement of further capital is required at the central bank. For credit losses provisioning is required for general purposes and for specific transactions. Furthermore, commercial banks must form macroprudential reserves to prepare for the negative waves in the economic cycle. By contrast, the requirements for investment banks are less strict as they are only required to obtain a licence and to make an account at a clearing house.
20 See JEFFERS Esther, PLIHON Dominique: Universal Banking and Shadow Banking in Europe p. 14.
21 Another example would be the credit default swaps (CDS) issued by AIG (American International Group) the extent of which could have resulted in the bankruptcy of the group in 2008 had the state not intervened
22 A trust is a separated asset management organ or an authorised person which manages the property entrusted to him, collects the benefits thereof and, if authorised, sells them and manages the incoming amounts.
23 See JEFFERS Esther, PLIHON Dominique: Universal Banking and Shadow Banking in Europe p. 14.
24 An asset bubble is the increase in price of a financial instrument induced by speculation which is inexplicable with the innate value of the instrument, even on short-term.
25 For the original definition see page 5.
26 The difference between universal and the non-universal banking can be explained with the licencing of commercial and investment banks. Banking systems in which banks may hold both licences are the so-called universal banking systems, alternatively known as the „European” or the „Continental” model. In comparison, the banking system of the United States is considered to be non-universal, as separate financial institutions are performing investment banking and commercial banking activities. However, due to the financial deregulation in the 1990s and 2000s financial holding corporations operated much like universal banks, since they could own both commercial and investment banks – up until the Dodd-Frank Act came into force in 2010.
27 See GHOSH Swati, DEL MAZO Inez Gonzalez, ÖTKER-ROBE Inci: Chasing the Shadows: How Significant Is Shadow Banking in Emerging Markets? Economic Premise The World Bank Poverty Reduction and Economic Management Network 2012 September, No. 88. p. 4.
28 A form of regulatory arbitrage is when the investment service providers choose to be seated in countries with more favourable or lenient regulatory environment. This decision may have cost implications, but the primary reason is lighter regulatory burden. With this method service providers can keep their costs down. The original meaning of arbitrage is when a financial instrument, that can be traded simultaneously on two different markets at least, is bought on the market with lower price and then instantaneously sold on the market with higher prices. This only happens when the difference between the two market prices is greater than the transaction costs.
29 See Chinese State Council Document No. 107.
30 Internet-based finance is generally conducted through financial institutions. The consideration of crowdfunding, debt and equity investments are collected on the accounts led by these institutions. Generally, lending through peer-to-peer (P2P) finance happens via financial institutions.
31 P2P (Peer to peer) Direct network between two users which came to be owing to the developments of the internet and computer network. Each user share their resources and they take part in the operation of the network as peers. The first example for such system was Napster, as the archetype for sharing music files.
32 Underground banks are unlicensed financial service providers that operate much like commercial banks. A typical form of that in China is the so-called hui (meaning: „come together”) which collects the savings of friends and family. It is an unofficial credit union which places savings among a circle of acquaintances. The leader is called „dong”. Sometimes „credit applications” are discussed over a dinner in restaurants and the election of the new dong is conducted in a similar manner. The interest rate of loans provided by underground banks is 2 or 3 times higher than loans provided by state banks. The nonperformance rate is low as the contracting parties know each other well.
33 Wealth Management Product -WMP is a kind of collective savings form which is available after a certain entrance fee (usually between 50 000 and 100 000 CNY, which is roughly the equivalent of 8 000 and 16 000 USD) and repayment of the capital is guaranteed by promissory notes
34 See GAO Siming, WANG Qianyu: Chasing Shadow in Different Worlds: Shadow Banking and its Regulation in th US and in China 11 Manchester J. Int’l Econ. L. 421 2014 430.old
35 The Chinese Academy of Social Sciences is the first and the most important scientific research institute in China. It was founded in 1977, it has currently 5 divisions where 3200 work in 35 institutes. It is actively cooperating the the supreme organ of the Chinese state, the State Council.
36 See ZHU Grace: Chinese Think Tank Puts Shadow Banking at 40% of GDP
37 See ZHU Grace: Chinese Think Tank Puts Shadow Banking at 40% of GDP
38 See HONG, Shen: China’s Shadow-Banking Boom Is Over Tighter Government Rules, Jump in Stock Market Curb Informal-Lending Sector See
39 See LIU Wei: Basel III. and Bank Regulation in China (2014) 7 J. Legal Tech. Risk Mgmt. 1 2014 page 19
40 The Banking Act of 1933 Part 217. section 12. prohibited commercial banks to pay interest for sight bank deposits (undeposited bank deposits) and it also limited the interest rate for different deposit facilities so that banks would finance agriculture instead of placing their deposits at larger financial institutions (risk free) from the savings they collected. Thus, on one hand a strong competition in interest paid was prevented from arising on the market, on the other hand, the state’s economic policies could be furthered even more. The reason behind the rule was to prevent the chain of events leading to the bankruptcy of many large banks during the course of The Great Depression between 1929 and 1933 in the United States. This rule was rendered null and void when the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 came into force on July 21st 2010.
41 Money market funds buy short term debts from the capital collected, much like deposits. By contrast, bond funds invest in state, municipal, or corporate bonds. The first money market fund was established in the United States by Bruce R. Brend and Henry B. R. Brown in 1971. The fund operated under the rules of the Investment Company Act of 1940 under the supervision of the Securities and Exchange Commission. The explicit purpose of the fund was to dodge Regulation Q, thus to pay interests for sight savings as they were not deposits but securities. The portfolio of a money market fund cannot consist of securities with maturity longer than 13 months, and the average weighted maturity of its assets cannot exceed 60 days. The fund shall not place more than 5% of its investments into securities issued by a single issuer, except for state bonds and repos.
42 Law of People’s Republic of China on Commercial Banks Section 31.
43 See AWREY Dan: Law and Finance in the Chinese Shadow Banking System, 48 Cornell Int’l L.J. 1 2015. p. 30.
44 See AWREY, Dan: Law and Finance in the Chinese Shadow Banking System, 48 Cornell Int’l L.J. 1 2015. p. 30.
45 See AWREY, Dan: Law and Finance in the Chinese Shadow Banking System, 48 Cornell Int’l L.J. 1 2015. p. 34.
46 See HONG, Shen: China’s Shadow-Banking Boom Is Over Tighter Government Rules, Jump in Stock Market Curb Informal-Lending Sector See
47 See AWREY, Dan: Law and Finance in the Chinese Shadow Banking System, 48 Cornell Int’l L.J. 1 2015. p. 26.
48 See Financial Stability Analysis Group of the People’s Bank of China, China: Financial Stability Report 2013, People’s Bank of China 217 (2013),
49 See AWREY, Dan: Law and Finance in the Chinese Shadow Banking System, 48 Cornell Int’l L.J. 1 2015. p. 26.
50 Centralised resource allocation is when the distribution of resources between market participants is done by the state through a specialised institution according to the state’s (economic) policies. The alternative of centralised resource allocation is the decentralised resource allocation, when the distribution of resources is decided by the emerging demand.
51 Allocation plays an important role in the distribution and the access to the savings collected and its transformation to investments by specifying the circle of participants in accordance with different economic policies.
52 See SPENCE Keith: Development in Banking and Financial Law 2009-2010 29 Rev. Banking & Fin. L. 1 2009-2010 p. 16.
53 Degree of freedom is concerns the increasing level of deviation band, as the act wishes to deter deviation from the band with the highest amount of fine to be imposed. See: The People’s Republic of China Law on Banking Regulation and Supervision Article 45 paragraph 4.
54 See China peer review report by FSB 2015. p. 58
55 Window guidance: The People’s Bank of China gives guidance quarterly for the banking system in the Quarterly Monetary Policy Report regarding the economic sectors to be loaned to and the volume of credit to be placed. The efficacy of the guidance varies, as the 4.6 trillion CNY earmarked for lending was overdelivered by 5 trillion CNY.
56 Real interest rate is the difference between the nominal interest rate stated in the contract or the securities and the inflation. If the nominal interest rate for a deposit is 2.5% per annum, and the inflation rate is 1.2% then the real interest rate is 1.3 %. Negative real interest rate develops in a highly inflated economy, when the markets are predicting the decrease or the stagnation of inflation
57 See GAO Siming: Seeing Gray in a Black-and-White Legal World: Financial Repression, Adaptive Efficiency, and Shadow Banking in China 50 Tex. Int’l L. J. 95 2015. p. 111
58 Entrusted credit is a credit where the transaction takes place with the involvement of an outsider intermediary.
59 Glass – Steagall Act may mean the four main parts of the Banking Act of 1933 which restrict securities trading activities of commercial banks and their subsidiaries. However, the whole Banking Act of 1933 may also be called as Glass–Steagall Act, after its two sponsors Senator Carter Glass and Rep. Henry B. Steagall.
60 This rule was in force until July 21st, 2011. The repeal was suggested by the Governing Board of FED while also requested the deletion of all references to Regulation Q.
61 See SCHWARCZ, Steven, L.:The Governance Structure of Shadow Banking: Rethinking Assumptions about Limited Liablity 90 Notre Dame L. Rev. 1 2014-2015 p. 12
62 TARP – Troubled Asset Relief Program, which was implemented by the Emergency Economic Stabilization Act of 2008, pumped liquidity into the banking system by buying securitised obligations. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 restricted shadow banking activities by introducing new regulation for hedge funds, swaps and securitisation.
63 JEFFERS Esther, PLIHON Dominique: Universal Banking and Shadow Banking in Europe see p. 12.
64 Spread is the statistical number showing the average deviation from the average. This indicator denotes the distance between the value of a set of numbers and their average. A large spread means that the distance is greater between certain values of a set of numbers and their average, whereas a small spread means that the values of a set of numbers are closer to their average.
65 JEFFERS Esther, PLIHON Dominique: Universal Banking and Shadow Banking in Europe see p. 14.
66 The heavy load – Italy’s latest attempt to stabilize its banking system. The Economist April 16th 2016. See
67 See ATIK Jeffery: EU Implementation of Basel III in the Shadow of Euro Crisis 33 Rev. Banking & Fin. L. 283 2013-2014 p. 319.
68 See JEFFERS Esther, PLIHON Dominique: Universal Banking and Shadow Banking in Europe see p. 6-11.
69 See KANE Edward J.: Shadowy Banking: Theft by Safety Net 31 Yale J. on Reg. 773 2014 p. 781.
70 Section 401-404 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 extended the supervisory powers of the FED over hedge funds by decimating the exceptions from under the regulation while increasing their disclosure obligations.
71 Commodities Trading Futures Commission – CFTC. Established in 1974, a governmental organisation which supervises the futures and options market on stock exchanges.
72 Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 Section 401-404.
73 See WILMARTH, Arthur, E., Jr: Refoming Financial Regulation to Adress the Too-big to-fail Problem 35 Brook. J. Int’l L. 707 2010 p. 754.
74 The Federal Deposit Insurance Company (FDIC) was established on June 16, 1933 by the Banking Act of 1933. It was created due to the events of the Great Depression in the United States, when between 1929-33 one third of the banks went bankrupt. The other reason for creating deposit insurance was the prevention of the serial occurrence of bank panics. The 2500 USD amount of the deposit insured was increased to 250 000 USD by the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010
75 This instrument is the discount window, which is a kind of temporary loan provided by the FED in the case of bank panic ensuring proper liquidity during the increased demand for cash. The European Central bank provides a similar loan called Standing Facility for financial institutions in a liquidity trap.
76 HOLDER, Eric (March 2013). “Testimony to the Senate Committee on the Judiciary”. video. United States Senate.
77 The full name of the act contains its goal to end the “too big to fail” era..
78 See GAO Siming, WANG Qianyu: Chasing Shadow in Different Worlds: Shadow Banking and its Regulation in the US and in China 11 Manchester J. Int’l Econ. L. 421 2014 p. 438.
79 Moral hazard is when one of the contracting parties abuses its position after the contract is made. In the case of financial institutions, it means the imprudent operation.
80 Proprietary trading is when a company tries to realise continuous profit by trading with its own capital. If the market moves to the opposing way to the position taken by the company, the company may incur losses, especially with derivatives. Proprietary trading directly endangers the company’s capital directly, whereas with intermediary trading only the client’s capital is exposed to the changes in the market.
81 G-20 is the organisation consisting of the governments and the central banks of the 20 most developed countries in the world. It was established in 1999, and the members are Argentina, Australian, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South-Korea, Mexico, Russia, Saudi-Arabia, South Africa, Turkey, United Kingdom, United States and the European Union. The annual meetings of the heads of states and governments are held separately from the meetings of the ministers of finance and the heads of central banks. The European Union is represented by the European Commission and the European Central Bank.
82 See
83 The deadline for the three involved – partially state owned – Chinese banks are the very first day of 2025 and 2028.
84 Bail-in means the saving of the bank with its own resources as opposed to bail-out provided by central banks from outside resources, such as the taxpayer’s money.
85 See
86 Bank panic is an extraordinary event or series of events when the clients of a financial enterprise are trying to enforce their outstanding claims against the financial enterprise due to presumed or real circumstances in great numbers. A memorable case of bank panic in Hungary was the Postabank-panic in 1997, where ten thousands of depositors were standing in line in front of the bank branches to obtain their savings.
87 See European Securities and Markets Authority Reports on Trend, Risks and Vulnerabilities 2015. Issue 2 p. 37.
88 The original meaning of prudent is careful, circumspect. In the financial sphere it means that transactions are only registered in the financial and accounting system after they were financially fulfilled, thus the consideration had been paid already. For financial institutions, prudent operation means a business policy which not only ensures profitability, but also at the same time maintains short and long-term liquidity.
89 Directive 2011/61/EU Preamble section 49
90 Directive 2011/61/EU Preamble section 51
91 Directive 2011/61/EU Preamble section 49
92 Prudential authorities are the authorities responsible for the oversight of capital markets.
93 Directive 2011/61/EU Preamble section 49
94 See Commission Staff Working Document – Impact Assessment – Accompanying the document – Commission Delegated Regulation upplementing Directive 2011/61/EU of the European Parliament and of the Council with regards to exemptions, general operating conditions, depositories, leverage, transparency and supervision – SWD (2012) 386 final. Accessible: p. 8.
95 Directive 2011/61/EU Preamble section 24
96 See Commission Staff Working Document – Impact Assessment – Accompanying the document – Commission Delegated Regulation upplementing Directive 2011/61/EU of the European Parliament and of the Council with regards to exemptions, general operating conditions, depositories, leverage, transparency and supervision – SWD (2012) 386 final. Accessible: p. 8.
97 See LEWIS Craig M.: The Economic Implications of Money Market Fund Capital Buffers U.S Securities and Exchange Commission Division of Economic and Risk Analysis pp. 34-35.
98 Those technological innovations which are used by commercial and investment banks during their operations. The concept was formerly applied to back office tasks, however, nowadays it covers the whole spectrum of banking operation, such as deposit collection or loaning.