On July 17, the European Banking Authority (EBA) published its opinion on the European Commission’s green paper on shadow banking. Opinion. The opinion focuses on several key areas, including the following:

• The definition of shadow banking- The EBA agrees with the definition of shadow banking proposed in the Financial Stability Board’s recommendations in April 2011. Recommendations.
• Functional approach – The EBA recognised that shadow banking has beneficial effects on the financing of the real economy and can help to foster growth. However, there are functional risks which need to be properly regulated. The EBA classifies these risks as liquidity and maturity transformations, interconnectivity and excessive leveraged positions set up by shadow entities or instruments.
• Large exposures – The EBA believes that the large exposures regime should act as a backstop regime to “shadow activities” and tackle the risk of interconnectivity by ensuring that interconnections are duly identified.
• Regulatory arbitrage – The EBA stands ready to prevent regulatory arbitrage and assess the need for regulation ability. The risks of regulatory arbitrage could increase as a response to the overhaul of the ongoing requirements under Basel III.