Shadow banking and European offshore financial centers: the blind spot in EU policy debates

When Lehman Brothers collapsed, the wider public was exposed to the complex world of finance, where credit is intermediated in unconventional ways outside of the regular banking system. Such unconventional finance has become known as 'shadow banking'. This paper contributes to the debate on shadow banking by explaining the role of European offshore financial centers (OFCs), namely, the Netherlands, Luxembourg and Ireland, in facilitating large scale regulatory arbitrage and tax avoidance. Current policy initiatives by the Financial Stability Board (FSB) and the EU have a blind spot where the role of OFCs in shadow banking is concerned. Furthermore, policy debates in the EU and OECD on tax avoidance ignore the role of tax arbitrage in shadow banking. This paper argues that an effective policy framework must address the European offshore dimension of shadow banking. This means that policies to address shadow banking should bring together both EU/FSB and EU/OECD policy processes to be effective. The discussion on tax evasion should be broadened to include the effect of tax havens on the spatial concentration of shadow banking activities.

Publication year:2014