EU regulators to probe links between banks and non-banks

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EU regulators will dig deeper into the links between banks and other financial firms such as hedge funds, said the chair of the European Banking Authority, as concerns mount about the potential for contagion from stresses in the wider system.

“We should be doing more and we are going to be doing more,” José Manuel 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. The sector grew after wave of post-crisis regulation drove some activities beyond the traditional banking sector while other areas outside the reach of regulators expanded, such as cryptocurrency.

After the 2020 dash for cash, when the mass dumping of stocks, bonds and other risky assets triggered market panic and central bank interventions, and 2022’s UK gilt markets crisis, regulators have raised the alarm on risks in the non-banking sector. These include hedge funds’ massive bets on US Treasuries and private capital’s exposure to rising rates.

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 with the Financial Times. “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.

“The first step in this situation is always getting information; it’s an obscure sector where the quality of data is not homogenous,” he said.

Campa also pushed back against European banks’ lobbying for a six-month extension to the latest global bank capital reforms that will bring the EU into line with the US and UK.

“The law says January 2025, so of course they should be making plans to implement [on that date],” he said of the final Basel package, whose implementation remains the subject of fierce debate in the US almost two years after the planned January 2022 start date. “We cannot continue to delay this.”

He added: “I don’t think that there is really a case that to preserve the level playing field we all have to implement on the same date.”

Campa was also unsympathetic to EU banks’ push for lawmakers to ease a post-crisis cap on bonuses after the measure was recently abolished in the US.

“The really important part is to make sure that we are assured by those banks that those bonuses are very well embedded in the risk management of the institutions,” he added, echoing recent comments from Elizabeth McCaul, the ECB’s supervisory board member.