The lines between asset managers, private equity firms, insurers and private credit funds are becoming increasingly blurred. For instance, private credit funds typically perform credit intermediation functions traditionally associated with banks, particularly in corporate credit markets, but without being subject to the same prudential requirements. Traditional classifications by product or entity type no longer fully capture the reality of more complex intermediation chains, writes Patrick Montagner, member of the Supervisory Board of the European Central Bank (ECB), for Eurofi Magazine.
New regulatory and supervisory approaches are needed to address specific vulnerabilities. In a fast-evolving environment, microprudential banking supervision is sharpening its focus on banks’ risk concentrations and interlinkages with the non-bank financial intermediary (NBFI) sector. For instance, this year the ECB has conducted an exploratory scenario analysis on counterparty credit risk (CCR) to strengthen supervised entities’ ability to model CCR under diverse stress conditions and provide a better understanding of vulnerabilities stemming from interlinkages with NBFIs. The exercise revealed significant variation in banks’ CCR exposures, with differences in collateral practices having a considerable influence on stress profiles.
Montagner noted that a broader macroprudential perspective is also needed to identify and address systemic risks in the NBFI sector. This should include assessing risks across financial sectors from a system-wide perspective, as well as enhancing the coordination of macroprudential policies for NBFIs at the EU level. The European Systemic Risk Board is well placed to support this effort. In addition, more integrated supervision of NBFIs would be a significant step towards developing EU capital markets.
“To address the systemic risks posed by NBFIs, we must also enhance the macroprudential toolkit at the EU level and complement existing rules focusing on investor protection and market integrity,” he wrote.
The Eurosystem made several recommendations in its response to the European Commission’s consultation on non-bank financial intermediation. First, Europe needs to swiftly implement recently agreed international reforms to the NBFI regulatory framework. This includes reforms to enhance the resilience of money market funds and to address vulnerabilities from liquidity mismatch in open-ended funds.
Second, system-wide stress tests are essential to identify and quantify risks across the financial system. And third, effective oversight of NBFIs requires improved coordination between authorities and better access to data. Finally, in the context of increasingly complex and diversified NBFI structures, adopting an activity-based perspective, in addition to an entity-based perspective, is essential. It would allow regulators and supervisors to holistically assess and address risks wherever they arise, ensuring that the regulatory perimeter captures all relevant risks and remains adaptable to financial innovation.