EU Regulators to Probe Banks and Non-Bank Financial Institutions
Regulators in the European Union are set to investigate the connection between banks and non-bank financial institutions (NBFIs) due to concerns that stress in shadow banks could have a ripple effect on the wider financial system. The European Banking Authority (EBA) will work with the European Systemic Risk Board (ESRB) and the Financial Stability Board (FSB) to understand how financial contagion may arise from shocks in shadow banking. NBFIs, which include hedge funds, private capital firms, and crypto groups, currently hold $218 trillion of the world’s financial assets. The EBA is already examining banks’ exposure to NBFIs and plans to develop reporting standards for transparency.
Addressing Direct and Indirect Links
EBA Chair José Manuel Campa acknowledges that direct links between banks and NBFIs, such as loans, are already being investigated. However, indirect links pose additional risks. For instance, if the value of assets favored by NBFIs drops, banks could be affected. Campa highlights the importance of gathering transparent data on non-bank exposures by developing significant minimum reporting standards.
Hot Take: EU Regulators Seek to Safeguard Financial Stability
European Union regulators are taking proactive steps to assess the potential risks posed by non-bank financial institutions (NBFIs), including crypto firms. As NBFIs continue to grow in size and influence, regulators are concerned about the potential systemic consequences if these entities experience stress or failure. By investigating the links between banks and NBFIs, regulators aim to better understand how financial contagion could arise from shocks within shadow banking. This move reflects regulators’ commitment to safeguarding financial stability and ensuring transparency in an evolving financial landscape.
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