A notice on the European Commission's European press website says, "On Wednesday 4 September, the Commission will adopt a communication on shadow banking. On the same day, the Commission will also present its proposal for a Regulation on Money Market Funds (MFF) -- one of the areas for action outlined in the communication." (The EU had been expected to issue a proposal this month, but it appears to have been delayed until September.) The statement says on "background," "Shadow banking is the system of credit intermediation that involves entities and activities that are outside the regular banking system. Shadow banks are not regulated like banks; they operate outside the regular banking system and yet engage in bank-like activities. The Financial Stability Board (FSB) has roughly estimated the size of the global shadow banking system at around E51 trillion in 2011, up from E21 trillion in 2002. This represents 25-30% of the total financial system and half the size of bank assets. Shadow banking is therefore of systemic importance for Europe's financial system. Learning all the lessons from the financial crisis, the EU has been implementing regulatory reforms in the financial sector in general and in the banking sector in particular. However, the entire shadow bank sector is not yet properly regulated. We must ensure that risks are not accumulating in the unregulated shadow banking sector, in part because new banking rules could be pushing certain banking activities towards this non-regulated shadow banking sector. The Commission's communication is a follow-up to last year's Green Paper on Shadow Banking (see IP/12/253 and MEMO/12/191). It summarises the work undertaken so far and sets out possible further actions in this important area. Money Market Funds (MMFs) are an important source of short-term financing for financial institutions, businesses and government. In Europe, around 22% of short-term debt securities issued by governments or by the corporate sector are held by MMFs. MMFs hold 38% of short-term debt issued by the banking sector. Because of the systemic interconnectedness of MMFs with the banking sector, and with corporate and government finance, the operation of MMFs has been at the core of the international work on shadow banking. The Financial Stability Board (FSB) and other institutions such as the International Organisation of Securities Commissions (IOSCO) and the European Systemic Risk Board (ESRB) have analysed the financial sector and concluded that MMFs, while of systemic importance, had not been addressed to a sufficient degree. The draft regulation will respond to the various recommendations that have been made."

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