In an effort to minimize risks of contagion, the EU finance watchdogs – European Banking Authority (EBA) and other EU regulators – have announced an investigation into banks’ links to non-bank entities, such as hedge funds, crypto, and private capital firms.
The EBA will probe how shadow banks, or non-bank financial institutions (NBFIs), can possibly affect lenders, the Financial Times reported on Wednesday. These entities hold almost half of the world’s financial assets, or about $218 trillion.
The EBA will work alongside the European Systemic Risk Board (ESRB) and the Financial Stability Board (FSB) to determine how disruptions by shadow banks could have knock-on effects on wider markets. The FSB oversees global financial stability.
According to the EBA’s chair José Manuel Campa, “We should be doing more and we are going to be doing more. We need to have an understanding of the whole underlying chain in NBFIs.
Campa added that implementing minimum requirements of reporting could provide regulators with more data on banks’ exposure to non-banks.
“The first step in this situation is always getting information; it’s an obscure sector where the quality of data is not homogeneous,” the EBA chair explained (via FT).
The decision by watchdogs comes at the start of a promising year for EU crypto regulation, with stricter rules expected to come into effect following MiCA.