Risk management regulations for the banking sector are insufficient for ensuring the stability of the non-bank financial sector, said the head of secretariat of the European Systemic Risk Board at an event yesterday.
Francesco Mazzaferro’s comments came alongside the launch of a European Commission consultation on macroprudential policies for non-banks, in a bid to manage risk in the shadow banking industry after a series of stress events have impacted the mainstream financial sector.
“Real estate investment trusts are much more important than banks in many jurisdictions with regards [to] risk-taking on commercial real estate, which is probably one of the most if not the most systemic risk to which we are exposed to,” said Mazzaferro during a European Commission workshop on macroprudential policies for non-banks on May 22.
“So if we are trying to solve the problem through banking regulation, we miss the point.”
Globally, regulators are struggling to assess shadow bank contagion risk, especially following some stress events such as the 2021 default of investment house Archegos.
NBFIs can be a source of financial instability, combining maturity mismatches and leverage, without the same degree of regulation that banks face.
The application of the macroprudential policymaking in banking needs a critical revision for the non-banking sector, he argued, noting the localised nature of banking in comparison with insurance and the broader investment sector.
The need to make sure the non-banking sector is safe and sound is especially arising as the EU aims to increase financial integration via its capital markets union project, which is poised to be a priority in the next European legislative mandate.
“[NBFIs] are very important for the capital markets union, which is still very much a work in progress, but does have a sense of urgency about it”, said Mairead McGuinness, European commissioner for financial stability, financial services and the capital markets union, at the same event.
She suggested stress testing could help to detect risks and assess the resilience of non-banks to shocks.
“We should improve our oversight and understanding of the interconnectedness in the financial sector. And that might be between non-banks and banks, or among different non-bank sectors”, she said. “We are not looking for a one-size-fits-all solution or to mirror the macroprudential framework for banks”.
No decision on potential new rules on the NBFI sector will be taken during this year and probably also a large part of next year, said Klaus Wiedner, director at the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union.
“We’re at the end of the [political] cycle right now so you don’t need to fear any proposal coming out in the next few weeks or months. If anything, the debate will be taken up again, at the political level under the next mandate. That’s why you have a consultation period of six months,” he said.
The consultation aims to gather further insight into the markets and business models of NBFIs, and the interconnectedness among them and with banks. It also aims to identify gaps in the macroprudential framework and other factors that may contribute to the build-up of systemic risks.
