03 January 2024

FT: EU regulators to probe links between banks and non-banks

EU regulators will dig deeper into the links between banks and other financial firms such as hedge funds, said the chair of the European Banking Authority, as concerns mount about the potential for contagion from stresses in the wider system. “We should be doing more and we are going to be doing more,” José Manuel Campa said about regulators’ efforts to predict how banks would be affected by strains in non-bank financial institutions (NBFIs), which include hedge funds, private capital firms and cryptocurrency groups. “We need to have an understanding of the whole underlying chain in NBFIs.”

NBFIs, sometimes known as shadow banks, hold almost half of the world’s financial assets, worth around $218tn. The sector grew after wave of post-crisis regulation drove some activities beyond the traditional banking sector while other areas outside the reach of regulators expanded, such as cryptocurrency.

After the 2020 dash for cash, when the mass dumping of stocks, bonds and other risky assets triggered market panic and central bank interventions, and 2022’s UK gilt markets crisis, regulators have raised the alarm on risks in the non-banking sector.

These include hedge funds’ massive bets on US Treasuries and private capital’s exposure to rising rates. Campa said the EBA, which conducts biennial stress tests on European lenders, would work with the European Systemic Risk Board and Financial Stability Board to develop a better understanding of how a shadow banking shock would ripple through to the wider system. The ESRB is the eurozone’s financial stability watchdog, while the FSB oversees global financial stability.

Campa said the EBA had already been carrying out assessments of the banks’ balance sheet exposures to non-banks, including loans. “That’s only the direct links,” Campa said in an interview with the Financial Times. “The problem is how it is transmitted into the banks . . . We are at the very early stages but [understanding that] is at the core of what the ESRB and FSB would like to get to.”...

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