In today's uncertain world, where new dangers seem to arise on a regular basis and at an almost dizzying pace, the EU remains vigilant in its mandate to protect the citizens and businesses within its borders.
As such, it's always on the lookout for areas that are currently under-scrutinised and open to risk. So in keeping with this approach, the European Systemic Risk Board (ESRB) has recently published a working paper aimed at gauging banks' potential exposure to shadow entities – institutions that engage in banking activities, yet which are not subject to banking regulations.
Their study – entitled Mapping the interconnectedness between EU banks and shadow banking entities – draws upon a "rich and novel dataset" to help identify and understand the instances and types of links that exist between banks in the EU and shadow banking entities, both within the EU and across the globe.
The research pays particular interest to factors such as:
- The number of EU banks interacting with shadow entities
- The relative locations of these banks within the EU
- The nature and frequency of these shadow banking transactions
- The regions and jurisdictions in which the shadow entities are based, particularly if there are cross-border implications
- The incidences of overlap in exposure, in terms of regional or transactional concentration
Using Orbis's structured data to filter and understand banking profiles and links
In addition to harnessing the official power and reach of the European Banking Authority (EBA), this working paper also calls upon Bureau van Dijk's Orbis database of more than 200 million private and public companies – more than 54 million of them in the EU – to aid in the collection and analysis of a vast amount of information on EU banks and the nature of their banking activities.
By using Orbis's structured information, particularly the capability it gives its users to quickly and easily locate crucial and detailed corporate and banking data, the study's authors have been able to hone in on the precise information that they need. As they describe it: "In order to explore the characteristics of EU banks (e.g. total assets, number of subsidiaries) in our sample, we also merge the EBA's data with bank-level information taken from Bureau van Dijk’s Orbis database."
Taking advantage of Orbis's ability to separate out company information into categories, such as, in this case, total assets and number of subsidiaries, the researchers were able to arrive at a final and authoritative sample of 131 banks and 3,182 individual exposures. With this highly specific data in hand, the working paper was then able to proceed to draw definitive conclusions about EU banks and the risk exposures they may confront when engaged in shadow banking transactions.
New regulatory framework
One of main goals that this study's research seems to be geared towards is the establishment of a regulatory framework to help deal with issues associated with shadow banking activities. By gaining awareness of and understanding about the parameters and characteristics of these sorts of transactions, the EU can then use this knowledge to help craft and set in place specific rules and laws to govern this previously unregulated area of the banking sector.
The legislation that might arise from the findings of this study, and others like it, could help to curb and control levels of exposure and risk faced by banks in the EU who do business with shadow entities, especially those headquartered outside of EU borders.
If like us you're in the business of certainty, that can only be a good thing.
Read the full working paper.