European Commission to launch consultation on risks in shadow banking sector
The European Commission is launching a consultation this year to identify the possibility of systemic risks among non-bank financial intermediaries.
In a report to the European parliament and the council, the body said that “a rapid expansion of non-bank financial intermediaries (NBFIs) can also generate new risks and challenges to financial stability”.
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“The growth of NBFIs has been accompanied by an increase in the riskiness of some asset portfolios, rising liquidity transformation and increased leverage, driven also by the ‘search for yield’ during an extended period of negative real interest rates,” the Commission said. “The interconnectedness between banks and NBFIs has also steadily expanded and increased the risk of contagion across the financial sector, with the potential to have negative spillover effects on the economy.”
The report said that the Financial Stability Board and the European Systemic Risk Board have identified three structural vulnerabilities that contribute to the build-up of systemic risk, and which are only partially covered by macroprudential policies today.
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These are liquidity mismatches, the build-up of excessive leverage, and the interconnectedness among NBFIs and between NBFIs and banks, which it said may create hidden risk amplifiers and transfer of risk from the banking to the non-banking sectors.
“As credit activity and risks shift increasingly from the banking to the non-banking sectors, the Commission will collect further evidence on missing tools, potential gaps in existing tools to meet macroprudential objectives and on the effectiveness and consistency of macroprudential policies for NBFIs in the EU,” the report said. “This work will underpin and support any policy decision that the 2024 2029 Commission may take in this area.
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“Therefore, the Commission plans to run a targeted consultation on macroprudential policies for NBFIs in 2024. The aim will be to collect further insights into the business models of key NBFIs and the interconnectedness among them and between banks and NBFIs, and to identify gaps in the macroprudential framework and other factors that may contribute to the build-up of systemic risks in non-bank financial intermediation.”
The Commission said that it will also consult this year on the review of the Securities Financing Transaction Regulation (SFTR). The SFTR aims at improving transparency on funding and lending transactions, to ensure better monitoring of risks resulting from non-bank credit intermediation.