The European Union is pushing for a more stable financial system by clamping down on "shadow banking" -- the high-finance sector that handles trillions of dollars but isn't bound by the same rules as banks.

 

The Commission, the EU's executive arm, said Wednesday that while investment vehicles such as money market funds or hedge funds are welcome because they provide extra sources of financing for companies and the economy, they can also pose serious threats to long-term financial stability.

 

Analysts and economists have argued that the lack of oversight in the shadow banking sector played a major role in the global financial crisis of 2008.

 

The global shadow banking sector was estimated to hold assets of about 51 trillion euros in 2011 (currently $67 trillion), or almost a third of the total financial system and half the size of bank assets, according to the latest figures available from the Financial Stability Board. About a third of the sector's assets are held by firms in the U.S. and some 45 percent in the 28-country European Union.

 

The Commission's new set of rules targets the 1 trillion euro ($1.3 trillion) money-market fund sector. The funds are an important refinancing tool for Europe's economy, currently holding almost a quarter of short-term debt issued by banks, governments or companies in Europe.

 

Commissioner Michel Barnier said many of the funds resemble banks in their operations by taking deposits and lending money, but aren't subject to the tough oversight banks face. That's why they are considered to operate in the "shadow" of traditional finance.

 

"That means we need transparency, a sound oversight and that the risk taken on by the players of this banking sector be subject to precautionary measures," Barnier told reporters in Brussels.

 

"The goal remains to draw the lessons from the (financial) crisis which we owe to the citizens, as we owe it to taxpayers and companies," he said, to ensure governments no longer have to bail out financial institutions in time of crisis. "No financial market, no financial product, no financial player will escape efficient rules and oversight."

 

Big companies often use the funds, each of which can have a value of up to 50 billion euros ($66 billion), to park billions of euros in cash there since they provide better returns than bank accounts while promising almost the same flexibility.

 

"The problem is that these funds aren't that stable and in case of (market) tensions, they can put the entire financial sector at risk, particularly the banks," Barnier said.