ESRB Publishes Non-Bank Financial Intermediation Risk Monitor for 2019
ESRB published the fourth issue of its annual Non-bank Financial Intermediation Risk, or NBFI, Monitor for 2019 (previously called the Shadow Banking Monitor). This report considers a range of systemic risks and vulnerabilities related to non-bank financial intermediation, including those related to interconnectedness, liquidity, and leverage. The report also highlights that further work is required to address remaining data gaps and improve risk assessments by developing metrics to measure liquidity, leverage, and interconnectedness.
The Risk Monitor, which covers data up to the end of 2018, contributes to the monitoring of a part of the financial system that has grown in recent years and now accounts for nearly 40% of the financial system in EU. It identifies several key risks and vulnerabilities in the shadow banking system in EU:
- Liquidity risk and risks associated with leverage among some types of investment funds and other non-bank financial institutions
- Interconnectedness and the risk of contagion across sectors and within the non-bank financial system, including domestic and cross-border linkages
- Activities-related risks—procyclicality, leverage, and liquidity risk—created through the use of derivatives and securities financing transactions
The report reveals that some non-bank financial institutions remain vulnerable to a repricing of risk, with potential spillovers to funding conditions of other financial sectors. In EU commercial real estate markets, transaction volumes and prices are near their previous peak in 2007. Given the increasing role of non-bank financial institutions, new forms of interconnectedness and transmission channels may arise. Cross-border reallocation of commercial real estate funding can result in excessive swings in asset prices and global commercial real estate markets may become more correlated. The growth of leveraged loans also reflects an increase in risk-taking. The low interest rate environment supports strong investor demand for such loan products which offer higher rates of return, but also carry greater risks. In an economic downturn, highly indebted borrowers may then be unable to refinance existing loans, resulting in higher default rates.
Furthermore, the report reveals that the use and reuse of financial collateral in derivatives and securities financing transactions can create intermediation chains, which can spread funding liquidity shocks. Haircut and margining practices in bilaterally and centrally cleared trades may force market participants to post additional cash or other cash-like collateral. Central counterparties, or CCPs, are important entities in helping to reduce risks between market participants. This also creates close interconnections, linking clearing members, which are mostly banks, and their clients such as insurance companies, pension funds, hedge funds, and other investment funds. These clients rely on a small number of dealer banks providing client clearing services. Through the use of repo transactions, interconnectedness between banks and non-banks increased in 2018, with balance sheet data for Euro Area banks showing a 21% increase in liabilities with other entities to EUR 254 billion.
Related Links
Keywords: Europe, EU, Banking, Securities, Insurance, Pensions, NBFI, Shadow Banking, Liquidity Risk, Procyclicality Systemic Risk, Interconnectedness, Leveraged Lending, ESRB
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Blake Coules
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Related Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.