While speaking at the XXVI Santander Iberian Conference in Madrid, the ECB Vice President Luis de Guindos shared his thoughts on the policy considerations to address the opportunities and challenges facing euro area financial institutions from a financial stability perspective. According to him, the key challenges facing euro area non-banks are low profitability, liquidity risk, climate change, and elevated exposure of non-banks to highly indebted segments of the corporate sector. Thus, he emphasized that developing a macro-prudential framework for the non-bank financial sector should be treated as a priority and outlined the ongoing contributions of ECB to the development of a framework for climate risk assessment.
The ECB Vice President said that non-bank financial intermediaries in the euro area have grown rapidly over recent years but they are also facing profitability headwinds and are therefore, searching for yield in riskier assets. Their increasing importance in financing the real economy and elevated vulnerabilities highlight the need for the development of a macro-prudential framework for this sector. Thus, developing a macro-prudential framework for the non-bank financial sector should be treated as a priority. New policy instruments should ensure that non-banks can sustain their financing of the real economy under different economic conditions. They should aim to mitigate risks related to procyclical risk taking, excessive leverage, liquidity and maturity transformation by increasing transparency on fund leverage, and aligning redemption terms more closely with the liquidity of funds' assets, for example. By internalizing the impact that non-banks' actions might have on the rest of the financial system and the real economy, such policy tools might curb non-banks' potential to amplify exuberance in upturns and adversely affect financial and economic conditions in downturns.
He also mentioned "a new dimension of risk that affects both banks and non-banks: the risks related to climate change, which have the potential to become systemic." ECB monitors the physical and transition risks faced by financial institutions. However, improved disclosure is essential to pursue this effort. Disclosure by firms and financial institutions tends to be incomplete and not always consistent. Mandatory and harmonized firm-level reporting of carbon emissions would be a step in the right direction as it would enable better pricing and monitoring of financial firms' exposures to climate-related risks. On the analytical front, ECB is contributing to the development of a framework for climate risk assessment and developing methods to gauge financial institutions' exposures to climate-related risks. The framework aims at integrating climate-related risks into regular financial stability monitoring and assessment, including climate risks stress-test analysis. Banks and non-banks are also doing their part to bridge data gaps and are preparing to address risks in the transition to a low-carbon economy.
Related Link: Speech
Keywords: Europe, EU, Banking, Insurance, Securities, Macro-Prudential Framework, Climate Change Risk, ESG, Stress Testing, Disclosures, Financial Stability, ECB, BIS
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