European Association of Corporate Treasurers

In our view the EBA’s proposed definition of a shadow bank would include also traditional and non-systemically risky activities of NFCs and therefore we do not agree with the current definition.

We believe that the suggested wording would bring many NFC intra-group activities in scope of the definition. NFCs use centralised treasury management as a means to increase efficiency, to reduce costs and volume of external transactions with banks and are standard practice for most NFCs. These activities include:

• Cash pooling in order to ensure the efficient use of cash across a group
• Parent company guarantees often required in one country for a subsidiary and made by a parent company in another and for which a proportionate credit charge is made to ensure transfer charging protocols are met
• Intragroup loans made by parent companies to subsidiaries and long term in nature to provide certainty to subsidiary suppliers where the funding of the loans is part of the funding mix of the parent and may be at any instance coevered by long and short term borrowings or by use of cash surpluses. As for guarantees, a proportionate credit charge is required to meet the requirements of domestic tax regimes.
• Intragroup hedging External derivative transactions (usually of net but sometimes of gross exposures) are often undertaken by a central unit and these are then mirrored appropriately as intra-group transactions with the part of the group where the underlying business risk has arisen.

These activities are ancillary and supporting the operative business, and part of normal functioning of company treasuries, and should not therefore be captured by the definition of shadow bank. These activities do not are not systemically risky and do not fulfil the concerns that the EBA has regarding shadow banks (section 3.1.1 of the consultation paper), i.e. run risks and liquidity problems, interconnectivity and spill overs, excessive leverage and procyclicality and opaqueness and complexity.

The legitimacy of NFC treasury centralisation has been previously recognised by the legislator in different legislative pieces, such as the European Markets Infrastructure Regulation (EMIR) where NFCs intra-group OTC derivative transactions are exempt from the central clearing obligation, MiFID II which waives from its full application investment services exclusively provided at group level; and the Payment Services Directive II which explicitly excludes from its scope corporate in-house payment factories established to process external payments in behalf of other group entities.

Classifying NFCs as shadow banking entities would have adverse effects on NFCs’ ability to access the required banking services as banks would be subject to more stringent requirements when dealing with such entities. Surely this is not an outcome that it is in line with the current policy priorities. We therefore urge the EBA to explicitly exclude NFCs from the definition of a shadow bank.
European Association of Corporate Treasurers