Regulators in the European Union will reportedly examine the relationship between banks and non-bank financial institutions (NBFIs), amid concerns that tensions at so-called shadow banks could ripple into the wider financial system.
According to a new report from the Financial Times, José Manuel Campa, chairman of the European Banking Authority (EBA), says regulators will step up their efforts to predict how banks will be affected by tensions in NBFIs.
NBFIs, which include hedge funds, private equity firms and crypto groups, now own $218 trillion, or almost half of the world’s financial assets. The report says the sector has become a financial behemoth as post-crisis regulations drive activities beyond traditional banking and unregulated areas such as crypto have flourished.
Campa says the EBA will work with the eurozone’s financial stability watchdog, the European Systemic Risk Board (ESRB), and the global financial systems monitor, the Financial Stability Board (FSB), to understand how financial contagion could arise from the shock of the shadow banking system.
“We need to have insight into the entire underlying chain of NBFIs.”
The EBA is already investigating the exposure of banks’ balance sheets to NBFIs, including loans, but Campa says these are direct links. Indirect links include the risk that banks will be hit if the value of assets popular with NBFIs falls, and that non-bank companies will sell these assets.
He says developing “significant minimum areas” of reporting will allow regulators to obtain transparent data on critical non-bank risks.
“The first step in this situation is always to obtain information; it is an obscure sector where the quality of the data is not homogeneous.”
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