Regulators in the European Union will reportedly probe into the connection between banks and non-bank financial institutions (NBFIs) amid concerns that stress in the so-called shadow banks may cascade into the wider financial system.
According to a new report from Financial Times, European Banking Authority (EBA) chair José Manuel Campa says that regulators will ramp up efforts to predict how banks would be affected by strains in NBFIs.
NBFIs, which include hedge funds, private capital firms and crypto groups, now hold $218 trillion, or nearly half of the world’s financial assets. The report says the sector became a financial behemoth as post-crisis regulations spur activities beyond traditional banking and non-regulated areas such as crypto flourished.
Campa says the EBA will work with the eurozone’s financial stability watchdog, the European Systemic Risk Board (ESRB), and global financial system monitor, the Financial Stability Board (FSB), to understand how financial contagion could arise from shadow banking shock.
“We need to have an understanding of the whole underlying chain in NBFIs.”
The EBA is already looking into the exposure of banks’ balance sheets to NBFIs, which include loans, but Campa says these are direct links. Indirect links include the risks of banks getting hit when the value of assets popular with NBFIs falls and the non-banking firms selling these assets.
He says developing “significant minimum areas” of reporting will enable regulators to get transparent data on crucial exposures of non-banks.
“The first step in this situation is always getting information; it’s an obscure sector where the quality of data is not homogenous.”
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