The European Commission, the European Union's executive body, has launched a public consultation and investigation into shadow banking practices in the region, as they aim to implement new controls and supervisory measures for the system in the future.

Speaking at a meeting in Brussels on Monday, the EU Commissioner for Internal Market and Services Michel Barnier acknowledged that shadow banking was posing a serious potential threat to long-term financial stability, despite providing close to 46 trillion euros ($60.87 trillion) to the economy.

"Shadow banking represents 25 to 30 percent of the world's financial sector,"noted Barnier, according to the Financial Times. "I'm not attributing any ulterior motives to people working in this parallel sector - they can provide a useful service and finance. I'm not waging a war against the system."

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"But like all financial players, they must be covered by regulation," he said.

The EU has been looking to shine a light on shadow banking regulations ever since some analysts believed that the system could be a primary cause of the 2008 financial crisis, and the subsequent European debt crisis.

The announcement on Monday is set to be followed by a conference next month for regulations on the shadow banking system, while the European Commission intends to implement new proposals from the Financial Stability Board, a global regulatory body, by early 2013.

According to the EU's draft paper on the subject, potential risks associated with shadow banking included "runs" on unregulated shadow banking that were financed by short-term funding, credit bubbles that emerged from assets being repeatedly "churned", shadow banking entities forming "chains" that hide risk and circumvent financial rules, and contagion from disorderly failures.

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"What we do not want is for financial activities and entities to circumvent existing and foreseen rules, allowing new sources of risk to accumulate in the financial sector," said Barnier, as quoted by Reuters.

"That is why we need to better understand what shadow banking actually is and does, and what regulation and supervision may be appropriate."

Still, the European Commission is likely to face a major challenge from some of its member nations, as countries such as the UK could be reluctant to hand over more supervisory power to pan-European financial authorities.

"If you seek to define shadow banking, it will migrate to escape regulation," said Graham Bishop, an expert in EU regulatory policy.

"We need to give regulators more leeway to ask if activities like these are something that poses a risk to the financial system."

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