Report
Non-bank financial intermediaries (NBFIs) now account for more than half of global financial assets, but it is not just assets that have moved beyond banks. Risk has increasingly shifted to less visible parts of the financial system and the rules have not kept up. Supervisors are without a full picture of the vulnerabilities building in today’s financial system. The EU should now level up the regulatory and supervisory regime for non-bank finance.
Banks and non-banks are connected
When risk moves beyond banks, it does not disappear. Shadow banking is not a parallel system. Banks and non-bank financial institutions are connected. They fund each other and share exposures to the same assets or borrowers. Through wholesale funding, repo markets, derivatives, securities financing transactions, investment funds and private credit, stress can return to banks when markets turn, or confidence falls.
As NBFIs are tightly connected to the core of the financial system, they pose a threat to financial stability. Finance Watch calls on EU policymakers and supervisors to locate the risk, close data gaps and level up rules for non-bank finance.
Locate the risk
Supervisors cannot manage risk they cannot see. Even banks are often unable to identify their own interconnected exposures. Information that matters for financial stability, such as where risk is concentrated or how much leverage is hidden in the system, remains fragmented and incomplete.
Finance Watch calls for this data to be made available to competent authorities and shared more effectively between supervisors. EU level system-wide stress tests are also needed to identify how stress could move between NBFIs and banks.
Manage the risk
Major non-bank financial institutions are now systemically important and should be treated as such. Europe needs a holistic supervisory framework for systemically important non-banks, stronger EU-level supervision, stronger reporting requirements and tools to limit excessive leverage, liquidity mismatches and regulatory arbitrage.
The EU should also finish the job on existing reforms, including money market fund liquidity buffers and minimum haircuts for securities financing transactions, while giving supervisors the power to remove flawed or overly risky products and practices from the market.
