ECB Official Says Shadow Banking Could Threaten Financial Stability

A European Central Bank board member is warning of threats tied to shadow banking. In an interview with the Financial Times published Wednesday (July 10), Elizabeth McCaul said the growth of hedge funds, private credit providers and other sources of financing outside the regulated banking system is the largest threat to Europe’s financial landscape. “There are certainly caution lights in front […]

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A European Central Bank board member is warning of threats tied to shadow banking.

In an interview with the Financial Times published Wednesday (July 10), Elizabeth McCaul said the growth of hedge funds, private credit providers and other sources of financing outside the regulated banking system is the largest threat to Europe’s financial landscape.

“There are certainly caution lights in front of us,” said McCaul. “The most prevalent one is the area into which we likely have the least visibility and where things can move faster than . . . the normal credit dynamics — that is the non-bank financial intermediaries market.”

The report cites data from the European Commission showing that the European Union non-bank organizations, often referred to as “shadow banks,” held assets worth $46 trillion last year, compared to $41.1 trillion for traditional lenders.

Data from the Financial Stability Board shows these groups held $218 trillion in 2022, or a little less than half the world’s financial assets.

The industry’s growth since the global financial crisis had been “remarkable” and “something that always worries us,” McCaul told the FT.

“It is outside of the banking supervisory and regulatory perimeter,” she said, noting that nebulous links between the sector and banks through repurchase agreements, lines of credit or derivatives sparks concerns about what this “translates into for systemic risks.”

Her comments came on the heels of remarks Tuesday (July 9) by European Banking Authority Chairman Jose Manuel Campa, who says the watchdog group is considering reporting requirements for nonbank financial institutions.

Campa said the rapid expansion of the sector presents a lack of transparency and the potential for problems that could creep into the broader financial markets.

“My sense is that as we map, we will have difficulties identifying the information,” Campa said, per a report by Reuters. “There will be black holes because, at this stage, there are no regulatory reporting requirements.”

Also Tuesday, PYMNTS noted that as regulators increase their focus on the shadow lending sector, traditional financial institutions are behaving more like neobanks.

“Open banking looks set to transform financial services in the United States, and the approach, in contrast to what has been seen in Europe, is market-driven rather than government-driven,” that report said. “A spate of announcements has served to highlight digital innovations that are changing the ways accounts can be opened and bundled with other offerings that go beyond direct deposit.”

In other words, PYMNTS continued, the long-held practice of walking into branches to open an account or add new services is becoming increasingly dependent on digital workflows.

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