11 September 2024

SUERF: EU non-bank finance returns to growth

by Portes, Kern, Bouvert, Oksenluk: Non-bank financial intermediation is playing a growing role in providing credit to the real economy and the financial sector, and 2023 saw the market return to its growth trajectory.

Market-based sources of financing are urgently needed in Europe, but this trend can bring risks to financial stability especially when non-bank entities use leverage, are exposed to liquidity mismatches or are highly interconnected with the rest of the financial system. This paper reviews structural features and risks to the EU financial system, such as the international dimension of the money market fund sector, as well as recent developments related to private finance and crypto assets. As current discussions on the Savings and Investments Union and the macroprudential approach for non-banks progress, a system-level view of non-bank finance in the EU points to the potential but also to the diversity and complexity of the markets and institutions.

Non-bank finance will be high on the EU agenda as the Parliament and the Commission start their new term.

Brussels is taking a fresh look at how to boost Europe’s capital markets, an objective given high priority by the April 2024 European Council. Market-based finance in Europe is widely considered to fall far short of its potential in terms of efficiency and its contribution to economic growth.

In parallel, the EU Commission has launched a review of the Union’s macroprudential policies¹ and the framework for non-bank financial institutions² in particular. Important questions are on the table about how non-bank finance in Europe can be made even more resilient and crisis-proof and how supervisory authorities can be better equipped for their work.

Both projects, the Savings and Investments Union and the Macroprudential Review, are closely interrelated: Since financial stability is a prerequisite for sustainable development of the financial system, macroprudential policies should be designed to support the plan for better capital markets. And as capital markets grow, so do financial risks, and the macroprudential framework must be fit to address them.

But how are EU non-bank financial markets and institutions doing currently? And in which areas are the risks rising³? The European Systemic Risk Board’s EU Non-bank Financial Intermediation Risk Monitor assesses the questions on an annual basis, and the 2024⁴ edition highlights the growth dynamics and key areas of risks...

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