ECB warns about financial risks from the shadow bank

The European Central Bank is very concerned about the financial pressure that spreads from non-bank financial companies to regular lenders in the market pressure period, ECB supervisor Sharon Donnery said.

Non -bank financial intermediaries, which are often called shadow banks, have grown in size over the past few years but face Laxer regulations and also do not have access to central bank liquidity facilities, making them more vulnerable during sharp market movements.

“As we have seen in the last few days, the potential correction of asset prices that suddenly remain significant due to geopolitical uncertainty,” Donnery said in a speech.

“Because non-bank may be among those who feel geopolitical stress, their relationship with banks is special attention,” Donnery added.

While ECB said that banks handled extreme volatility last week with relatively easy, Donnery’s comments showed concern outside the institution supervised by the ECB, such as hedge funds or other investment funds.

The problem is that banks often have direct exposure to non-bank through loan and investment activities, making them vulnerable to shocks originating from the non-bank sector, according to Donnery.

“The complexity and opacity of several activities in the non-bank sector can increasingly obscure risk concentration, complicate bank risk management efforts,” he said.

Donnery asked parliamentary members to strengthen the regulatory framework, target the mismatch of liquidity in the money market and open funds and strengthen the readiness of liquidity.
Source: Reuters