“Stricter regulations for 'shadow banks'” - ECB head raises alarm about risk in financial system
Europe must strengthen regulations on non-bank financial institutions to create a level playing field with traditional lenders and control risks in a sector that has grown significantly over recent decades, European Central Bank President Christine Lagarde said.
Non-bank institutions, such as investment funds, insurance companies and pension funds, otherwise known as “shadow banks”, currently hold assets worth around 350% of the Eurozone’s Gross Domestic Product. However, they enjoy lighter regulations compared to banks, as they do not accept deposits from households.
"It is essential that policymakers adapt regulations and supervision to this challenging new reality," Lagarde said during a speech in Amsterdam.
“They should not do this by lowering standards for banks, but by raising them for non-bank institutions that perform similar activities or that have strong ties to the banking system. This helps address the concerns that banks have about unequal competition,” she added.
Policymakers fear that, in the event of a crisis, central banks will be forced to provide liquidity support to non-bank institutions, due to the close ties they have with traditional banks.
“If risks begin to accumulate outside the banking system, beyond the current purview of regulators and supervisors, the compromises that were evident before 2008 could return. In that case, monetary policy would remain the “de facto” only tool to curb financial euphoria,” Lagarde warned.
For this reason, she said that Europe should simplify regulations for banks, without relaxing existing rules, as well as strengthen control over non-banking institutions.
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