EU Regulators Investigate Bank and Shadow Bank Connections

Regulators in Europe are reportedly probing the ties between banks and non-bank financial institutions (NBFIs).

This investigation is borne out of concerns about possible contagion due to stresses in the larger system, European Banking Authority (EBA) Chair José Manuel Campa said in a Financial Times (FT) interview published Wednesday (Jan. 3).

“We should be doing more and we are going to be doing more,” Campa said in reference to efforts to gauge how banks would be impacted by strains in the NBFI space, which includes crypto companies, hedge funds and private capital groups.

“We need to have an understanding of the whole underlying chain in NBFIs,” he added.

Also known as “shadow banks,” NBFIs have around $218 trillion in holdings, the FT report notes, accounting for nearly half the world’s financial assets.

According to Campa, the EBA would team with the European Systemic Risk Board and Financial Stability Board to come up with a better picture of how a downturn in the shadow banking space would impact the wider system. He added that his authority has already conducted assessments of banks’ exposure to non-banks.

“That’s only the direct links,” Campa told the FT. “The problem is how it is transmitted into the banks … We are at the very early stages but [understanding that] is at the core of what the ESRB and FSB would like to get to.”

The EBA investigation comes amid a number of efforts around the world to regulate the shadow banking sector.

For example, the U.S. Treasury Department’s Financial Stability Oversight Council (FSOC) in November approved a new analytic framework for financial stability risks and updated guidance for non-bank financial company determinations process.

According to the FSOC, the framework provides “a detailed public explanation of how the council monitors, assesses, and responds to potential risks to financial stability, whether they come from widely conducted activities or from individual firms.”

The FSOC first proposed the rules for designating non-banks a “systemically important financial institution,” in April following the collapse of Silicon Valley Bank and two other lenders.

Meanwhile, the Reserve Bank of India, that country’s central bank and banking regulator, tightened its lending rules for NBFIs in November following a wave of smaller loans and a jump in delinquencies.