pentti hakkarainen : shadow banking – what kind of regulation for the ( european ) shadow banking system? notes by mr pentti hakkarainen, deputy governor of the bank of finland, for the panel discussion at the safe summer academy 2014 “ shadow banking : evolution, background, perspectives ”, brussels, 3 september 2014. * * * a viable and well - functioning shadow banking system is beneficial for the real economy before going to the actual topic of today ’ s panel and presenting some thoughts on regulation of the ( european ) shadow banking system, let me start with a few words on how i see the shadow banking system. i will not go too much into the details of the definition and coverage of the shadow banking system as it has been a topic of another discussion earlier today. let me just say that it is very important to have a clear understanding of what we are talking about and hence what we potentially try to regulate and supervise. i would like to highlight that i see many benefits in a viable and well - functioning shadow banking system. shadow banking is a modern, sophisticated, and complementary way to share risks efficiently. it is also an alternative way to allocate resources in the economy outside the regular banking sector, upon which we here in europe are particularly dependent. we may even be too dependent on banks according for example to the advisory scientific committee of the european systemic risk board. 1 thus it is important to revitalise and strengthen alternative funding channels which can further support sustainable growth in the real economy. competition with reputation rather than heavy regulation my short answer to the question expressed in the topic of this panel ( what kind of regulation for the european shadow banking system ) is that calls for regulation are justified. however, the shadow banking system should not be regulated in the same way as the regular banking sector. let me elaborate on this view. first, we must ensure that regular banking activities and shadow banking activities should not be mixed or confused with each other. it should be crystal clear for investors in for example money market funds that they do not enjoy any coverage comparable to a deposit insurance system. similarly, it should be clear to entities in the shadow banking system that they will not be supported by the government ( the same applies to banks as failing banks will not be supported or bailed - out as the new recovery and resolution framework has been fully implemented ) nor that they have access to the liquidity support of the central bank. if shadow banking entities were under similar regulation and supervision as

’ s recent essay as a companion. whenever monetary policy really matters, i. e.. when the outlook is a cause for great concern, there is so much uncertainty in the air about current and future behaviour, including previous policy decisions still working themselves out in the pipeline. any policy measure to be taken will overlap and interact with many other past and future decisions. so there we are, pretty naked ( or perhaps : naked, but not pretty ). xxx obviously, so are those who analyse and comment on central bank policy. for that reason, the commentary does not always advance our understanding of what would be a way forward. this applies equally to criticism as well as the occasional approval. there is another reason : it is often difficult to precisely pinpoint the target and focus of a comment. quite often a comment is not really about how the ecb conducts policy but about whether and how maastricht should be changed. often a desire to achieve a shift in the objectives of ecb policy is involved, away from the primary role of price stability. i am of course more interested in suggestions as to how we might best accomplish the task within our mandate, by which we are bound. of course the mandate may also be an interesting subject of inquiry, but it belongs in a different compartment. for the ecb, there can be no question about the primacy of price stability as an objective. the treaty is very explicit on this point. other possible objectives, including the exchange rate, are strictly subordinated. i have some difficulty imagining how we would in practice pursue secondary objectives in parallel with a primary goal, having only an interest rate at our disposal. there would occasionally be scope to let those secondary concerns weigh in the setting of rates, but it could never be anything systematic and consistent. one wonders whether analytically a case can credibly be made for such on / off occasional fine tuning of occasional objectives. in popular political debate, there are, as you know, constant demands of this kind, so this is not an impertinent remark to make. having expectations of low inflation, i. e. monetary stability, firmly in place is really irreplaceable in providing the conditions for pursuing all those other policies immediately concerned with the real economy and human welfare. this is in my view no minor point. getting expectations of monetary stability firmly is in itself an enormous job for monetary policy. my personal prejudice is that, apart from good faith, transparency is more