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 José Manuel Campa, the chair of the European Banking Authority, as concerns mount about the potential for contagion from stresses in the wider system.

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. 

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. "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."

Indirect links include whether banks could be hit by a sharp fall in value of assets popular with NBFIs, such as treasuries or real estate, if the latter group were forced to sell those assets.

Campa said the understanding of those issues could be helped by developing "significant minimum areas" of reporting so that regulators would have transparent data on crucial exposures of non-banks.

(Source: Financial Times)