European Union Internal Market and Services Commissioner Michel Barnier on Wednesday proposed new rules for money market funds (MMFs) and tighter regulations for so-called shadow banking.

The draft regulation has been designed to ensure MMFs can better withstand redemption pressure in stressed market conditions by enhancing their liquidity profile and stability.

Shadow banking is the system of credit intermediation that involves entities and activities that are outside the regular banking system. They are not regulated like banks yet engage in bank-like activities. MMFs, types of investment funds and products with deposit-like characteristics are parts of shadow banking.

According to the EU's new proposal, MMFs in the EU would be required to have at least 10 percent of their portfolio in assets that mature within a day and another 20 percent that mature within a week. This requirement would allow MMFs to repay investors who want to withdraw funds at short notice.

MMFs would also need to establish a predefined capital buffer to support stable redemptions in times of decreasing value of its investment assets.

"The shadow banking system plays an important role in financing the real economy and we need to ensure that it is transparent and that the benefits achieved by strengthening certain financial entities and markets are not diminished by the risks moving to less highly regulated sectors," Barnier said.

The Financial Stability Board has roughly estimated the size of the global shadow banking system at around 51 trillion euros (67 trillion U.S. dollars) in 2011. This represents 25 to 30 percent of the total financial system and half the size of bank assets.