Featured Product

    ESRB Publishes Non-Bank Financial Intermediation Risk Monitor for 2019

    July 17, 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
    Related Articles
    News

    EC Regulation Sets Out Standards for Reporting and Disclosure of MREL

    EC published the Implementing Regulation 2021/763 that lays down implementing technical standards for supervisory reporting and public disclosure of the minimum requirement for own funds and eligible liabilities (MREL).

    May 12, 2021 WebPage Regulatory News
    News

    APRA Decides to Standardize Submission Date for Quarterly Reporting

    APRA announced the standardization of quarterly reporting due dates for authorized deposit-taking institutions.

    May 11, 2021 WebPage Regulatory News
    News

    ECB Working Group Publishes Recommendations on EURIBOR Fallbacks

    The private sector working group of ECB on euro risk-free rates published the recommendations to address events that would trigger fallbacks in the Euro Interbank Offered Rate (EURIBOR)-related contracts, along with the €STR-based EURIBOR fallback rates (rates that could be used if a fallback is triggered).

    May 11, 2021 WebPage Regulatory News
    News

    Bundesbank Publishes Supporting Documentation for Reporting by Banks

    Bundesbank published a list of "EntryPoints" that are accepted in its reporting system; the list provides taxonomy version and name of the module against each EntryPoint.

    May 11, 2021 WebPage Regulatory News
    News

    EBA Publishes Phase 1 of Reporting Framework 3.1

    EBA published the phase 1 of its reporting framework 3.1, with the technical package covering the new reporting requirements for investment firms (under the implementing technical standards on investment firms reporting).

    May 10, 2021 WebPage Regulatory News
    News

    APRA to Finalize Capital Adequacy Standard Revisions by January 2022

    Asia Pacific Australia Banking APS 111 Capital Adequacy Regulatory Capital Basel RBNZ APRA

    May 10, 2021 WebPage Regulatory News
    News

    ESMA Issues Guidelines on Outsourcing to Cloud Service Providers

    ESMA published the final guidelines on outsourcing to cloud service providers.

    May 10, 2021 WebPage Regulatory News
    News

    EBA Publishes Data on Deposit Guarantee Schemes

    EBA published annual data for two key concepts and indicators in the Deposit Guarantee Schemes (DGS) Directive—available financial means and covered deposits.

    May 10, 2021 WebPage Regulatory News
    News

    OSFI Sets Out Plan for Future Guidance on Managing Technology Risk

    OSFI has set out the schedule for release of draft guidance on the management of technology risks by federally regulated financial institutions and private pension plans.

    May 10, 2021 WebPage Regulatory News
    News

    MAS Updates Housing Loan Rules, Proposes Corporate Governance Guidance

    MAS updated rules for new housing loans by banks and finance companies.

    May 10, 2021 WebPage Regulatory News
    RESULTS 1 - 10 OF 6964