ECB to continue chasing shadows
29 June 2016 Frankfurt
Image: Shutterstock
The EU’s ‘shadow banking’ sector poses a growing threat of unquantifiable systematic and liquidity risk for as long as it remains undefined, according to the European Central Bank.
In a recent paper from its ongoing series on economic topics, the ECB reiterated the importance of gaining more detailed reporting data from entities that engage in alternative financing, also known as shadow banking, as a way of removing some of the mystery around the industry's size and better managing market risk.
The ECB cited further monitoring of securities lending, collateral management and derivative transactions specifically as central to this initiative.
The Securities Financing Transaction Regulation, which is already being phased in stages between Q1 2016 and 2018, will soon include reporting requirements that will used by the ECB to further its aim of understanding the shadow banking sector.
The significant increase of shadow banking means that the distribution of risk exposures has become wider and presents systemic risks that need to be “detected, monitored and managed”, according to the ECB.
The value of the shadow banking industry has doubled in the past decade to now account for €28 trillion worth of assets and represent a third of the euro area’s financial system, according to the ECB.
But the central bank admitted that the broadness of its current metrics may be overstating the size of the industry in the euro area as it includes special financial institutions and holding companies, which may not actually engage in shadow banking.
The ECB acknowledged that “during the crisis years, shadow banks, notably investment funds, have acted as an important buffer for the real economy as bank credit to the private sector contracted”.
The ECB also highlighted a growing liquidity mismatch within the investment fund sector, along with the trend of interlinking between systemically important institutions, as key concerns to be addressed.
“Open-end funds add to the illusion of stable liquidity conditions by promising daily callable claims to purchase assets which may not be very liquid in a period of market repricing. While most euro area funds offer daily redemption to investors, their cash buffers and shares of liquid and short-term assets have been falling.”
“This increases the sector’s vulnerability to large-scale redemptions and raises the risk of an adverse liquidity spiral.”
The paper continued: “While limited balance sheet data suggest that vulnerabilities within the shadow banking sector are growing and links to the wider financial system and real economy are strengthening, data limitations prevent drawing a definitive conclusion on the systemic nature of the risks. Additional balance sheet statistics for the subcomponents are needed to draw firm conclusions.”
In a recent paper from its ongoing series on economic topics, the ECB reiterated the importance of gaining more detailed reporting data from entities that engage in alternative financing, also known as shadow banking, as a way of removing some of the mystery around the industry's size and better managing market risk.
The ECB cited further monitoring of securities lending, collateral management and derivative transactions specifically as central to this initiative.
The Securities Financing Transaction Regulation, which is already being phased in stages between Q1 2016 and 2018, will soon include reporting requirements that will used by the ECB to further its aim of understanding the shadow banking sector.
The significant increase of shadow banking means that the distribution of risk exposures has become wider and presents systemic risks that need to be “detected, monitored and managed”, according to the ECB.
The value of the shadow banking industry has doubled in the past decade to now account for €28 trillion worth of assets and represent a third of the euro area’s financial system, according to the ECB.
But the central bank admitted that the broadness of its current metrics may be overstating the size of the industry in the euro area as it includes special financial institutions and holding companies, which may not actually engage in shadow banking.
The ECB acknowledged that “during the crisis years, shadow banks, notably investment funds, have acted as an important buffer for the real economy as bank credit to the private sector contracted”.
The ECB also highlighted a growing liquidity mismatch within the investment fund sector, along with the trend of interlinking between systemically important institutions, as key concerns to be addressed.
“Open-end funds add to the illusion of stable liquidity conditions by promising daily callable claims to purchase assets which may not be very liquid in a period of market repricing. While most euro area funds offer daily redemption to investors, their cash buffers and shares of liquid and short-term assets have been falling.”
“This increases the sector’s vulnerability to large-scale redemptions and raises the risk of an adverse liquidity spiral.”
The paper continued: “While limited balance sheet data suggest that vulnerabilities within the shadow banking sector are growing and links to the wider financial system and real economy are strengthening, data limitations prevent drawing a definitive conclusion on the systemic nature of the risks. Additional balance sheet statistics for the subcomponents are needed to draw firm conclusions.”
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