The shadow banking system can broadly be described as “credit intermediation involving entities and activities (fully or partially) outside the regular banking system” or non-bank credit intermediation in short. Earlier this year, the FSB published policy recommendations to strengthen oversight and regulation of shadow banking. The objective is to address bank-like risks to financial stability emerging outside the regular banking system while not inhibiting sustainable non-bank financing models that do not pose such risks.
The FSB set out a monitoring framework for the shadow banking system in its report to the G20 in October 2011. Based on this framework, the FSB published the results of its third annual monitoring exercise in November 2013 using end-2012 data. The report includes data from 25 jurisdictions and the euro area as a whole, bringing the coverage of the monitoring exercise to about 80% of global GDP and 90% of global financial system assets.
The exercise was conducted by the FSB Analytical Group on Vulnerabilities (AGV), the technical working group of the FSB Standing Committee on Assessment of Vulnerabilities (SCAV), using quantitative and qualitative information, and followed a similar methodology to that used for the 2012 report . Its primary focus is on a “macro-mapping” based on national Flow of Funds and Sector Balance Sheet data (hereafter Flow of Funds), that looks at all non-bank financial intermediation to ensure that data gathering and surveillance cover the areas where shadow banking-related risks to the financial system might potentially arise.
OECD – Paris, 22 February 2012
Greece: signs international tax agreement to tackle tax evasion
Greece has signed the Convention on Mutual Administrative Assistance in Tax Matters, a multilateral agreement that was developed jointly by the Council of Europe and the OECD and that is open for signature to all countries. The Convention promotes international co-operation in the assessment and collection of taxes.
As taxpayers increasingly operate on a global basis, tax authorities are moving from bilateral to multilateral co-operation and from exchange of information on request to more effective forms of collaboration. The Convention is an effective and practical tool to help tax authorities in their everyday work.
At a time when Greece is looking to shore up its economy in line with a new financial package supported by the Euro area countries and other stakeholders, the Convention will allow Greece to work more closely with other countries to combat tax avoidance and evasion.
“In addition to demonstrating its commitment to following the international standards on tax transparency and exchange of information, this signing is a step towards Greece’s efforts to restore the longer-term sustainability of its public finances. The Convention will help Greece improve its internal tax collection system and pursue the tax revenues lost to tax avoidance and evasion. This will ensure that individuals and multinational enterprises pay the right amount of tax, at the right time and in the right place,” said OECD Secretary-General Angel Gurría.
Signatories to the Convention are so far: Argentina, Australia, Belgium, Brazil, Canada, Denmark, Finland, France, Georgia, Germany, Greece, Iceland, India, Indonesia, Ireland, Italy, Japan, Korea, Mexico, Moldova, Netherlands, Norway, Poland, Portugal, the Russian Federation, Slovenia, South Africa, Spain, Sweden, Turkey, Ukraine, the United Kingdom and the United States.
>> Further information about the Convention on Mutual Administrative Assistance in Tax Matters is available at www.oecd.org/ctp/eoi/mutual
08 February 2011
Handling Irregular Immigration in the EU
The two-tier system of national and supranational EU legislation in the field of Justice and Home Affairs has proven problematic for the implementation of measures designed to deal with Europe’s significant, but greatly exaggerated, challenge of irregular immigration.
By Diego Acosta for ISN Insights
Irregular or undocumented migration in the EU is a multifaceted phenomenon. Its complexity arises from the fact that irregular migrants are an amazingly heterogeneous category, raising questions about the adequacy of dealing with it without addressing its various intricacies. Irregular migration has also been highly politicized, both at the national and EU levels, with rhetoric often depicting it as an ‘invasion’. This politicization has in some cases led to its criminalization. However, this politicization is not matched by the number of irregular migrants actually entering the EU. According to the most reliable statistics, there were only between 1.9 and 3.8 million irregular migrants in 2008, barely representing between 0.39 and 0.77 percent of the total EU population of around 500 million.
To understand and correctly assess this phenomenon and European responses, it remains vital to explore the past, present and future of measures that the EU and its member states have implemented in an attempt to deal with the issue, most notably regularization procedures and the adoption of various European directives.
Why regularization matters
Irregular migration mostly follows from the lack of legal channels to enter or remain in a country, linked with the existence of an unregulated job market in certain sectors. The term ‘irregular migrant’ refers to a variety of phenomena and people, from third-country nationals who enter the territory of a member state without authorization by land, sea and air with the help of organized criminal networks of smugglers and traffickers, to the largest group of people that enter legally with a valid visa or under a visa-free regime, but “overstay”, to those who are unsuccessful asylum seekers who do not leave after a final negative decision. There is a last category which includes those who no longer fulfil the conditions of legal entry, stay or residence . Thus, holders of expired residence permits are de jure irregularly residing in a member state. This phenomenon, known as “befallen irregularity” , results from slow bureaucracy and arises in some member states when a third-country national becomes unemployed and cannot renew a temporary residence permit for example.
There are two main options in dealing with irregular immigrants in the EU: regularization and deportation. While the EU as a whole has no competence to deal with regularization, individual member states have recurrently used regularization processes as a means of dealing with the problem. ‘ Regularizations‘ are special programs which offer migrants in an irregular administrative situation the possibility to obtain a legal residence and work status upon fulfilling a certain set of conditions, such as having a job offer, a clean criminal record and a history of residence in that member state. Regularizations programs are crucial, as they have been the most important means for achieving legal status in Southern Europe although they have not been so central in Northern and Central Europe. There are some member states which have expressed reservations about regularization programs (such as Austria, France, Germany and Belgium), as they consider them to constitute a pull-factor for future irregular immigration .
However, the abandonment of regularization processes would certainly increase the extent of informal employment and the size of the informal sector, considering that there is a mismatch between efficient channels for regular immigration and the needs of workers in some sectors such as agriculture, construction or domestic help. The European Commission has indeed stated on numerous occasions that these regular channels should be made available for labor migrants. This mismatch has been clearly revealed in Italy, where despite strong rhetoric against irregular migrants, the government had to launch a regularization procedure in 2009 through which 300,000 housemaids and caretakers asked for a residence permit. The final number of permits granted is still not known.
In fact, between 1996 and 2008 there were 43 regularization programs implemented in 17 of the 27 EU member states. At least 3.2 million irregular migrants obtained legal status as a result of these programs. During negotiations for the adoption of the European Pact on Immigration and Asylum undertaken when France held the EU presidency, a proposal to ban regularizations at the European level was brought up. This was finally not adopted due to the opposition of the Spanish government. The new 2009 EU multiannual program in the area of Justice and Home Affairs for the years 2010-2014, known as the Stockholm program, only refers to the need to improve the exchange of information on regularizations at the national level.
The EU only obtained a clear-cut competence to regulate immigration issues in 1999 with the entry into force of the Amsterdam Treaty. Since its inception, addressing irregular immigration, including the repatriation of undocumented migrants, has formed a central part of the EU’s common immigration policy. The EU always advocated the idea that an effective return policy was vital to ensuring public support for phenomena such as legal migration and asylum. It was understood that third-country nationals who did not have a legal status enabling them to stay in the EU, either on a temporary or permanent basis, should leave. A credible threat of forced return, the commission argued, would send a clear message to potential irregular migrants that irregular entry into the EU would not lead to a stable form of residence.
With that background in mind the EU adopted a variety of legal instruments in relation to irregular immigration in the past decade. Among them, the Council Directive 2001/40 on mutual recognition of decisions on the expulsion of third-country nationals , Council Directive 2003/110 on assistance in cases of transit for the purposes of removal by air , and the 2004 Directive which defines the conditions for granting residence permits of limited duration to third-country nationals who are victims of trafficking in human beings and who cooperate with authorities . In 2010, however, the European Commission produced a report on the implementation of this last directive in which it stated that the directive’s impact had been insufficient in light of the reduced number of residence permits granted under it.
These instruments, however, were not comprehensive enough and did not take into account all the elements present in the repatriation of a migrant, such as removal, detention or the possibility of prohibiting re-entry. To that end, in 2008 the EU adopted, after a long and arduous negotiation process, Directive 2008/115 on common standards and procedures in member states for returning illegally staying third-country nationals, known as the Returns Directive. The 24 member states bound by the directive (the UK, Ireland and Denmark are not subject to its application) should have implemented it by 24 December 2010, although most of them have yet to completely integrate it into national legislation.
The Returns Directive is considered to be the most contentious piece of legislation ever adopted by the EU in the area of immigration. Among its more controversial provisions is the possibility of detaining a migrant for a period up to 18 months, the possibility of a re-entry ban into the EU for a period of five years and the chance to detain and return unaccompanied minors. These provisions, among others, provoked much criticism from international organizations, such as the Council of Europe, and from Latin American countries in particular, a major source of immigrants to the EU.
A year later the EU adopted the directive providing for minimum standards on sanctions and measures against employers of illegally staying third-country nationals . The rationale for this legal measure is that one of the elements that encourages irregular immigration is the possibility of finding work . Hence, the objective of the directive is to forbid the employment of irregular migrants by sanctioning employers who infringe that prohibition. This directive has also been criticized because the EU has not taken into account the fact that irregular immigration is very much linked with the rigidity of national immigration laws . Member states are however set to implement this directive by 20 July 2011.
Irregular migration, a profoundly complex challenge, needs to be tackled through a variety of means, including legal immigration channels . Moreover, EU member states should put in place the necessary resources to deal with the problem: The efficient and timely issuance of residence permits or renewals is key, for example, as it ensures that third-country nationals do not fall into an ‘ irregular situation‘.
Finally, when an irregular migrant cannot be expelled, for whatever reason, member states should make use of the possibility provided by Article 6 of the Returns Directive of granting them an autonomous residence permit or other authorization offering a right to stay for compassionate, humanitarian or other reasons. The European Commission and the Court of Justice will continue to monitor the situation and should pay special attention to the incorrect or incomplete implementation of these key EU measures.
Dr Diego Acosta is a Lecturer in Law at the University of Sheffield. His publications include “The Long-term Residence Status as a Subsidiary Form of EU Citizenship. An Analysis of Directive 2003/109”, Martinus Nijhoff Publishers: Leiden, 2011.
This is not your usual sovereign contagion post.
We’ve argued once before that Ireland’s failed bondholder bailout has unleashed contagion that does not just threaten the eurozone. Sudden illiquidity could also strike banking systems across the core, returning markets to volatility last seen during the late-2008 crisis.
That moment in the market witnessed an intense dollar shortage for European banks, requiring the establishment of central bank swap lines. Trouble reappeared over Greece in May 2010 and dollar swaps were again pressed into service. Interesting to observe the current pressure on euro basis swaps, even if it’s nothing like at levels of the recent past:
But back to this core illiquidity risk.
Ireland looms surprisingly large as a node in this globalisation process. For example — here’s a chart Monk points out that underlines Ireland’s share of the $25,500bn global funds industry:
Not bad for a very small economy. Not good for financial contagion.
That’s because the IMF paper really uses ‘global funds industry’ as a euphemistic portmanteau for the shadow banks. You should know ‘em well enough by now, but if not, the paper has a nice summary of what shadow banks (or if you prefer, nonbank financial intermediaries) did:
In the run up to the crisis, LCFIs [large, complex financial institutions] generally increased their reliance on market-sensitive funds, as the global search for yield prompted a move away from more expensive deposit funding. Facilitated by regulatory arbitrage, this liability re-composition also reflected, and was supported by, changes on the asset side, through securitization, ratings creep, and leverage. This process resulted in balance sheet growth and aided greater interconnections of banks with nonbank funding sources and across borders. It also resulted in the buildup of systemic risk concentrations and formed the critical fault lines along which liquidity shocks were subsequently transmitted globally.
Transforming maturities, enhancing liquidity, arbing the regs.
For example, consider a structured investment vehicle connected to a bank that borrowed short-term liquidity from the money and repo markets for investing in longer-term asset-backed securities. It was a relationship hedged with credit derivatives, and unfortunately primed to blow up in 2007 and 2008.
That’s a horrific simplification, but there you are. Fast forward to 2010.
What the paper points out is not only that European banks remain far more connected to the funds industry than their US peers; but also that funds’ overall cross-border exposures are still not fully understood, amid a complex ecology of countries that are common lenders and/or common borrowers, and sometimes key offshore finance centres to boot.
Which is where we start to move from shadow banks to shadow sovereigns. It’s a good bet Greece is a bit less interconnected with banking and shadow banking systems in the core than Ireland. But there’s an interesting chart in the IMF paper (click to enlarge):
This is assuredly not the path of Greek contagion markets have been looking for in 2010. And as the authors explain (emphasis ours):
Figure 10 presents four clusters (i.e., countries that together form more of a closed system), centered around a set of core connections that are closely linked to Greece: (i) a red cluster of countries with access to funds domiciled in Luxembourg; (ii) a black cluster with access to funds domiciled in the offshore centers of British Virgin Islands, Jersey, Cayman, Guernsey, and the Isle of Man; (iii) a blue cluster with Ireland at the core; and (iv) a green cluster of the U.S. with several key European and other countries. Greece is interconnected with each of the central nodes of these clusters. This close interconnection across other core countries suggests why asset re-allocations and flows might have been large systemically, with potentially significant impact on countries such as Ireland.
Which should perhaps focus minds on the consequences of not carrying through an orderly sovereign restructuring in Ireland or Greece — or any other distressed sovereign hiding out there, actually. (A chart with the Kingdom of Spain in the centre would be most interesting.) There’s an emerging consensus that this must be prepared for. See the latest German whizz on when restructuring provisions should be inserted into that two-tiered eurozone government bond market, for example.
(And the above applies just as much to any European bank bondholder burden-sharing as part of a sovereign restructuring, of course.)
It’s practically a truism these days that a modern European sovereign default would be vastly larger in terms of size of debt, and much more legally complex than the Russian or Argentine restructuring that once held the records. Even without considering any tricky shadow bank connections.
Doesn’t stop it being a lethal truism if tested, though.