Shadow Banking in Europe

The financing of the economy has undergone dramatic changes over the last two decades. In fact, a growing source of credit to the private sector has been generated outside the traditional banking system. Meanwhile, banks have offloaded credit risk from their balance sheet and changed their funding structures. These evolutions have been considered by many observers as one of the main roots of the current financial crisis. In particular, these evolutions have highlighted the key role played by the so-called shadow banking system. While shadow banking is still mainly a US phenomenon, it has also developed in Europe, in particular in the UK but also in the Euro area. Despite sustained efforts by the European Commission to foster maximum harmonization, delays in harmonizing both financial regulation and supervision in Europe raise specific concerns regarding the monitoring and the surveillance of the shadow banking system.