(Bloomberg) — The European Union is proposing simulating shocks to help it better understand risks for the lenders emanating from their links to other financial firms known as shadow banks.
Any such exercise would “sharpen the ability of supervisors to detect risks and vulnerabilities,” Mairead McGuinness, the bloc’s commissioner for financial services and markets, said in a speech on Wednesday in Brussels. It would need to happen in a “system-wide manner” and involve “all relevant authorities from both bank and non-bank worlds.”
The call for more information from one of the EU’s top financial officials highlights how the growth of firms that provide credit but aren’t traditional lenders — sometimes referred to as shadow banks — has caught the attention of regulators. While they have a deep understanding of what’s happening in banking, many developments outside that sector happen away from their scrutiny, even though they’re often connected.
“We may need to improve our ability to detect risk, especially risk that is hidden in layers of intermediation that are often complex to supervise,” McGuinness said. “We should improve our oversight and understanding of the interconnectedness in the financial sector.”
Regulators frequently perform large-scale exercises called stress tests that seek to simulate how banks would fare in a severe crisis. The exercises typically require banks to compile and process large amounts of data, sometimes tying up significant numbers of staff for months.
The regulators conducting a potential stress test would seek to “minimize the administrative burden” on the participants, McGuinness said in her speech.
Regulators spent more than a decade after the 2008 credit crunch shoring up lenders’ financial strength, yet a series of shocks outside the banking sector have since put a spotlight on other risks. The EU is moving faster than some other jurisdictions in drafting new standards for non-banks such as private credit funds, while acknowledging that excessively onerous rules would choke off a needed source of funding.
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