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EU regulators are planning their first stress take a look at to search for vulnerabilities within the monetary system outdoors of banks, reflecting fears concerning the speedy progress of much less regulated teams corresponding to hedge funds and personal fairness.
The plans by European authorities to look at the affect on the broader monetary system of a possible market disaster, which might additionally embrace pension funds and insurers, observe an analogous debut train by the Financial institution of England final yr.
Officers on the EU’s major monetary watchdogs are nonetheless discussing the main points of such a system-wide stress take a look at of non-bank establishments, however they’re optimistic that it might be launched subsequent yr, in line with two folks concerned within the talks.
The transfer is more likely to increase critical issues amongst hedge funds, non-public credit score teams and cash market funds that they might be subjected to larger scrutiny and restrictions by European regulators sooner or later.
For the reason that 2008 monetary disaster, the supply of loans has shifted from banks’ stability sheets in direction of different companies that behave like conventional lenders however are extra calmly regulated.
Non-banks accounted for a few quarter of the full €19tn inventory of loans within the Eurozone on the finish of 2023, in line with the European Central Financial institution, which mentioned “increasingly more loans are being supplied by insurance coverage companies and pension funds”.
Supervisors are rising more and more involved concerning the opacity and potential dangers these companies might current, in addition to hyperlinks again to the banking system. Lending by Eurozone banks to such non-bank companies has tripled since 1999 to succeed in €6tn by the tip of 2023.
Non-banks have been central to a number of episodes of market turmoil in recent times, together with a dash-for-cash in bond markets after the pandemic hit, the collapse of household workplace Archegos Capital Administration three years in the past, and a liquidity crunch at power merchants after Russia invaded Ukraine.
“We’ve seen some disaster episodes . . . the place liquidity threat spillovers got here from the NBFI, non-bank monetary intermediation house,” Claudia Buch, chair of the ECB’s supervisory board, informed the European parliament in a current listening to.
“So, it’s necessary that that is additionally nicely understood and nicely regulated,” Buch mentioned. “So not all NBFIs are extra dangerous than banks or different monetary establishments, however we have to deal with the dangers there in the proper approach and in addition the regulation must be focused to these dangers.”
EU regulators additionally fear that the area has been sluggish to tighten guidelines for cash market funds, that are an necessary supply of funding for banks, leaving them with decrease minimal liquidity necessities than these within the US and UK.
Some nationwide authorities in Europe have already introduced they’re planning to launch an analogous stress take a look at of so-called non-bank monetary intermediaries (NBFI), together with these in France.
The EU train would construct on the precise sector-focused stress assessments already carried out commonly for banks, insurance coverage firms, cash market funds and clearing homes within the 27-country bloc.
The purpose is to look at how a disaster would unfold between completely different elements of the monetary system and whether or not this might amplify the shock fairly than absorbing it.
Discussions have included the European Banking Authority, the European Securities and Markets Authority, the European Insurance coverage and Occupational Pensions Authority and the ECB, in addition to the European Fee and the European Systemic Danger Board. The regulators and the fee all declined to remark.
The fee mentioned on Friday it might delay the implementation of more durable capital necessities for banks’ securities buying and selling companies by a yr till early 2027. The delay will permit Brussels to attend for readability on whether or not the US will go forward with the foundations agreed by international regulators on the Basel Committee on Banking Supervision.
The BoE concerned greater than 50 Metropolis of London establishments in its so-called system-wide exploratory situation — which included the theoretical default of a hedge fund — to mannequin how a interval of stress would ripple via non-bank companies.
Metropolis companies have been relieved when the BoE mentioned resilience was “comparatively excessive” in liability-driven funding funds in pensions schemes, which had brought about a disaster in gilt markets two years earlier.
Nevertheless it additionally warned that fireplace gross sales of property by pension funds, hedge funds and different traders might amplify a market disaster, particularly as many had “mismatched expectations” about their means to lift money in a meltdown.
Extra reporting by Paola Tamma
