In a recent speech, European commissioner for Financial Stability, Mairead McGuinness, discussed a variety of vulnerabilities, including the build-up of excessive leverage across certain non-bank financial intermediaries (NBFIs).
She said that stress testing could help to detect risks and assess the resilience of non-banks to shocks. To be effective, stress-testing may need to be conducted in a coordinated and system-wide manner. It should involve all relevant authorities from both bank and non-bank worlds and include all possible systemic risk amplifiers, like liquidity mismatches and excessive leverage.
A system-wide exercise could inform the risk management practices of market operators, as much as it could sharpen the ability of supervisors to detect risks and vulnerabilities. Looking at the recent experiences of central banks, a system-wide stress test could also help the authorities fill in the data gaps and foster coordination among authorities and market participants.
“Of course, when looking at a system-wide stress test, we should also try to minimize the administrative burden on market participants,” she said in the speech.
In emailed commentary, Joseph Cordahi, Product Strategy Director at NeoXam, said: “It’s clear that NBFI’s can no longer hide from regulatory scrutiny and should be taking steps to prepare for any proposals that result from the consultation. First and foremost, firms must ensure they have robust stress testing capabilities in place to ensure compliance with any upcoming regulatory requirements.
“However, stress testing must be viewed as more than just a regulatory checkbox, and recognized for what it truly is: a powerful way to enhance financial stability and gain a competitive edge in an increasingly unpredictable market environment. By highlighting the importance of stress tests for NBFI’s, the European Commission is not only enhancing the resilience of the financial sector to non-bank shocks, but also emphasizing the importance of data-driven risk management practices, which are the bedrock for weathering financial storms.”
Read Finadium coverage on how regulators are thinking about leverage limits for NBFIs