ECB board member calls for regulatory crackdown on shadow banking

NON-BANK financing is posing a risk to financial stability in the Eurozone and needs to be better regulated, a central banker has said.

Dutch economist Klaas Knot, who is a board member of the European Central Bank, has said that the growth of the so-called shadow banking sector is creating a major risk to financial stability in the bloc.

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“Non-bank financial intermediaries provide a high and increasing share of financing in the high-yield debt market,” he said in a speech in Amsterdam on Monday, cited by a Reuters report.

“Should conditions deteriorate, such financial intermediaries are directly exposed to considerable potential losses.

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“And perhaps even more important, there could be system-wide spillovers beyond the high-yield debt markets.”

He reportedly called for stricter regulation of non-bank lending in order to mitigate risks, citing the example of mortgage lending rules in the Netherlands that apply to banks and other lenders alike.

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“If we conclude that … excessive debt and leverage of non-financial counterparts are actually the main drivers of risk, we could also look for instruments that aim to address these directly, such as borrower-based regulation,” he said.

Knot was recently named vice chair of the Financial Stability Board (FSB), which was set up in 2009 and monitors and makes recommendations about the global financial system.