European Banking Authority Chairman Jose Manuel Campa said the watchdog organization may make reporting requirements for nonbank financial institutions a “next step.”
Campa said the rapid expansion of the “shadow banking” sector, which includes hedge funds, private credit providers and insurers, presents a lack of transparency and the potential to have problems that could extend to the broader financial markets, Reuters reported Tuesday (July 9).
“My sense is that as we map, we will have difficulties identifying the information,” Campa said, per the report. “There will be black holes because, at this stage, there are no regulatory reporting requirements.”
Nonbank financial institutions accounted for just fewer than half of the world’s financial assets in 2022 — to the tune of $218 trillion — the report said, citing data from the G20’s Financial Stability Board (FSB).
Private credit lenders are also becoming an alternative source of financing for companies that have difficulty raising money from traditional banks, according to the report.
In 2022, these lenders provided an estimated $333 billion in loans — up 60% from 2021’s total, the report said, citing data from the Alternative Credit Council (ACC).
The potential threat to the broader financial system posed by this sector was illustrated by the 2021 collapse of Archegos Capital Management, a private investment fund, which caused losses at a member of the core banking system, Credit Suisse, per the report.
Regulators are working on this issue but are seeking a consensus needed for international rules, according to the report.
The FSB is gathering data on nonbanks and their ties to regulated lenders and will release its findings later this year, the report said.
In addition, the Bank of England conducted its first sector-wide stress test and is now building a case for new rules, per the report.
It was reported in January that European regulators were probing the ties between banks and nonbank financial institutions, with Campa saying at the time that there were concerns about possible contagion due to stresses in the larger system.
In February, Bank of England deputy governor Sarah Breeden said at a conference that there was a need for more research into nonbank lenders to prevent a “credit crunch” that could result from a pull-back by hedge funds, pension funds, asset managers and insurers.
In June, it was reported that the U.S. Federal Deposit Insurance Corp. (FDIC) is taking a harder look at FinTechs, nonbanks and the risks tied to some of those companies.
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