EU regulatory bodies propose rigorous examinations for the hidden financial market segment
European Supervisors Intensify Scrutiny over Shadow Banking Sector
The European regulatory landscape is preparing to ramp up its examination of the so-called shadow banking sector. In a significant stride, next year is set to witness a comprehensive stress test for various Non-Bank Financial Intermediaries (NBFIs), marking the first time such a test will be implemented. This assessment will expand upon sector-specific tests that have been regularly carried out for banks, insurers, money market funds, and clearing houses within the European Union (EU).
Regulatory authorities will employ a variety of stress scenarios to gauge any potential weaknesses in risk management coverage.
European supervisors are keen on shining a light on the shadow banking sector's intricacies, with plans to include an examination of the interplay between shadow banks and commercial banks in the upcoming test.
The European Union's scrutiny extends beyond traditional banking sectors, as they contemplate a system-wide stress test for hedge funds and private equity firms. This move underscores the need to assess the resilience of financial entities beyond the conventional banking spheres.
Global efforts led by the Financial Stability Board (FSB), which emphasize enhancing liquidity preparedness among non-bank financial institutions (NBFIs) and improving leverage risk management, may guide future stress testing frameworks within the EU. Additionally, the focus on better risk management practices among NBFIs could indirectly impact the assessment of interactions between NBFIs and commercial banks in the shadow banking sector.
The European Banking Authority (EBA) is also working on enhanced disclosure requirements for banks regarding exposures to shadow banking entities. This initiative aims to improve transparency and consistency in financial reporting, potentially influencing the evaluation of relationships between NBFIs and commercial banks in the shadow banking sector.
Yet, a specific stress test for NBFIs within the EU has not been officially announced. Still, the growing emphasis on financial stability and transparency across non-traditional financial sectors implies future assessments for NBFIs could incorporate similar principles, emphasizing sector-specific risks and the interaction with commercial banks.
- European regulatory authorities are planning to scrutinize the interplay between shadow banks and commercial banks, as part of the comprehensive stress test for various Non-Bank Financial Intermediaries (NBFIs) next year.
- The European Banking Authority (EBA) is working on enhanced disclosure requirements for banks, aiming to improve transparency and consistency in financial reporting regarding exposures to shadow banking entities, potentially influencing the evaluation of relationships between NBFIs and commercial banks.
