European Union: European Banking Authority Shadow Banking Guidelines – Part 4: The Impact Of The Guidelines

To view previous alerts in this series, please click here.

In the fourth and last of our updates in the current series on the European Banking Authority's (EBA) draft Guidelines on limits on exposures of EU regulated banks to shadow banking (the Guidelines), we examine how the proposed requirements might impact the behavior of both shadow banks and regulated banks. This update develops the themes outlined in our earlier updates.

To recap, shadow banks undertake the same types of activities (described as credit intermediation activities) as regulated banks, but do so outside a system of prudential regulation. Certain credit intermediation activities are inherently risky and if shadow banks carry out these activities, then exposures to them will be inherently risky from both a macro-prudential and micro-prudential perspective. Exposures to shadow banks also potentially provide the opportunity for regulated banks to undertake regulatory arbitrage, using shadow banks as intermediaries when it comes to taking risks that the former are unable to take in an efficient manner. These concerns have provided the motivation, from a policy standpoint, to control the exposure of the regulated banking sector to the shadow banking sector. As we describe below, the Guidelines propose that this should be achieved by regulated financial institutions setting limits to their individual exposures to shadow banks and to the shadow banking sector as a whole.

What is an Exposure?

In the definitions section of the Guidelines, the phrase "Exposures to shadow banking entities" is defined as "exposures to shadow banking entities pursuant to Part Four of the CRR with an exposure value equal to or in excess of 0.25% of an institution eligible capital". Exposures, in and for the purposes of Part Four of Regulation (EU) No. 575 2013 (CRR), which deals with large exposures, means any asset or off-balance sheet item referred to in Part Three, Title II, Chapter Two of the CRR. While this lists a series of different types of exposure and the associated risk weights for capital adequacy purposes, it does not provide a definition. However, from a practical standpoint, an exposure would include any situation where a regulated bank is or may be owed money by a shadow bank or may owe money to a shadow bank. An example of the former is where a regulated bank lends money to a shadow bank and expects to receive payments of interest and repayments of principal. An example of the latter is where a regulated bank sells credit protection to a shadow bank through a credit default swap or similar arrangement and may be required to make credit protection payments.

It is noteworthy that "small" exposures are excluded from what will amount to an exposure for the purposes of the Guidelines, though of course a large number of small exposures could result in there being a material exposure overall.

Collecting Information

Firstly, under the Guidelines, regulated banks will be required to collect detailed information about the exposures that they have to shadow banks and to identify:

  • their individual exposures to shadow banking entities;
  • all potential risks arising from such exposures; and
  • the potential impact of those risks.

These requirements present a potentially significant burden to regulated banks. As drafted, once an entity has been categorised by a regulated bank as a shadow bank (a matter that requires definitional certainty), each exposure to that shadow bank that exceeds the 0.25% capital threshold referred to above would have to be identified and comprehensively analysed from a risk perspective. In some cases, this should be relatively straightforward, for example, where a regulated bank has provided a loan directly to a shadow bank or has provided credit protection to a shadow bank. In other cases, the process might be more difficult, for example, where the asset management division of a regulated bank has invested in the equity of an investment fund that then may invest in private equity funds, some of which may have debt strategies, resulting in them being regarded as shadow banks. Therefore for EU regulated banks, the collection and processing of information about their dealings with shadow banks will be yet another regulatory burden. On the other hand, while preparing and sharing the relevant information with regulated banks is equally burdensome for shadow banks, this, along with adopting a diversified approach to accessing the facilities that they require from regulated banks, may also be in their interests.

Controlling Risks

Secondly, having identified and analysed its individual exposures to shadow banks, the regulated bank will be required to adopt a framework to manage, control and mitigate the risks that it has identified. This requires, as a preliminary matter, that the risks are appropriately understood by a regulated bank. In addition to focusing on the individual risks arising from its exposure to individual shadow banking entities, a regulated bank will also be expected to focus on the "interconnectedness" between different shadow banking entities, and between itself and the shadow banking entities. The EBA recognises the practical difficulty with doing this, and so the Guidelines require a regulated bank to set out "appropriate mitigation techniques" in order to address the situation where interconnectedness cannot be analysed with certainty. While it is clearly possible to envisage situations of interconnectedness when dealing with shadow banks, it is more difficult, it is suggested, to identify concrete information or prepare concrete analyses in relation to the impact of such interconnectedness. Assume, for example, that a regulated bank has provided a facility to a shadow bank that uses this facility to refinance loans that it has made to three other shadow banks who all lend to SMEs in the UK. On the face of it, the regulated bank has exposure to three shadow banks (the clients of its client) as well as its own client. All of these entities could be adversely affected by factors that impact upon the SME sector, such as the increases in the minimum wage. Determining interconnectedness in this situation seems straightforward; however, analysing the quantitative effects of interconnectedness will not be so easy. From a practical perspective, the development by regulated banks of appropriate mitigation techniques that involve limiting the ultimate sectorial exposure may be advisable.

Management Oversight

Thirdly, the Guidelines propose that once the exposures and associated risks have been identified, the steps proposed to manage, control and mitigate those risks should be regularly subject to scrutiny by the management body of regulated banks. This is an important governance matter because it requires senior management of a regulated bank to both inform itself of, and assess its exposure to, shadow banks.

Setting Limits

The Guidelines' fourth requirement, perhaps the most significant, requires regulated banks to set their exposure limits. The exposure limits, as we have indicated in our earlier updates, operate at two levels. Firstly, regulated banks are required to set aggregate limits to the shadow banking sector as a whole, relative to their eligible capital. Secondly, the regulated banks are required to set limits to individual exposures to shadow banks.

The setting of aggregate limits is by reference to the characteristics of the regulated bank, where individual regulated banks are required to take into account:

  • its business model, risk management framework and risk appetite;
  • the size of its exposure to shadow banking entities relative to regulated financial services sector entities; and
  • factors relating to interconnectedness.

The setting of individual limits, on the other hand, is largely by reference to the characteristics of the shadow banks that the regulated bank has exposure to, including:

  • the regulatory status of the shadow banking entity, in particular whether it is subject to any form of prudential regulation (it should be borne in mind that an entity will not be regarded as a shadow bank at all if it is subject to a suitably robust system of prudential regulation);
  • the financial situation of the shadow banking entity;
  • the shadow bank's portfolio (in particular non-performing assets);
  • the credit process used by the shadow bank (although the Guidelines recognise that there may be a limited amount of information available to a regulated bank on this);
  • whether the shadow bank will be vulnerable to asset price or credit quality volatility;
  • whether the volume of credit intermediation activities represent a significant amount relative to other activities of the shadow bank (although as discussed in Part 2 of our series of updates on the Guidelines, it is arguable that if the credit intermediation activity carried out by an entity is merely incidental to its predominant business, it should not be classified as a shadow bank);
  • interconnectedness; and
  • any other factors that the regulated bank regards as relevant.

While the Guidelines outline that individual exposure limits will be set on an analytical basis, if this is not possible, an aggregate exposure limit of 25% of a regulated bank's eligible capital will be used (the "fallback approach"). This provides a regulated bank with a practical, albeit blunt, means of achieving compliance with the Guidelines. It does not, of course, do away with the need for definitional certainty with respect to the terms "shadow bank" and "exposure", nor with the need for regulated banks to undertake an assessment of the risks stemming from such exposures.


Shadow banks are a feature of the post-financial crisis world, and they come in many different forms – from the lending platforms of the world's largest private equity and hedge fund managers, to P2P lenders, and to entities engaged in various forms of consumer lending using crowd-funding techniques. Given that these entities will be clients of, and work with, regulated banks (not just competitors), the formulation of the Guidelines to regulate the interaction between the shadow banking sector and the regulated banking sector is highly important for the ongoing development of the capital markets.

Ropes & Gray will continue to monitor developments in this area.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.