The European Commission is launching a consultation on macroprudential policies for Non-Bank Financial Intermediation (NBFI), a sector which will underpin the long-awaited Capital Markets Union.
In a speech by European Commissioner Mairead McGuinness at DG FISMA’s technical workshop, the commissioner said NBFI is “an important part of the financial ecosystem”, comprising investment funds, insurance companies, family offices, as well as “operators and the infrastructure of capital markets”.
“And together, these entities are very important for the Capital Markets Union, which is still very much a work in progress, but does have a sense of urgency about it,” McGuinness said.
To make a Capital Markets Union a reality requires political leadership, McGuinness said. “We will do our best in the Commission, as we’ve done, but we need greater political leadership to complete the Capital Markets Union.”
NBFI is also important for financial stability, which should underpin the Capital Markets Union, McGuinness noted, highlighting “stress events” in recent years that have revealed the often hidden interconnections between NBFI sectors across the financial system. “And this adds a layer of unpredictability and increases liquidity and leverage risks.” In response to these stressors, the Commission has legislated to mitigate systemic risk from key NBFI sectors. Looking ahead, the consultation will consider how emerging systemic risks are dealt with across NBFI.
“We are taking a complete, overall view of NBFI across all of its different parts. We want to assess macroprudential policies and supervision beyond banks in a cross-cutting way. And I think we need to better understand the risks and vulnerabilities from the different sectors and their impact on the resilience of the financial system.”
A January report examining “specific vulnerabilities” within NBFI highlighted structural liquidity mismatches; the build-up of excessive leverage across certain NBFIs; interconnectedness that could create unforeseen risk amplifiers or transfer risk from the banking to the non-banking sectors; and a lack of consistency and coordination among macroprudential frameworks across the EU.
Responding to the speech, Joseph Cordahi, product strategy director at NeoXam, said: “It’s clear that NBFIs can no longer hide from regulatory scrutiny and should be taking steps to prepare for any proposals that result from the consultation. First and foremost, firms must ensure they have robust stress testing capabilities in place to ensure compliance with any upcoming regulatory requirements.
“However, stress testing must be viewed as more than just a regulatory checkbox, and recognised for what it truly is: a powerful way to enhance financial stability and gain a competitive edge in an increasingly unpredictable market environment. By highlighting the importance of stress tests for NBFIs, the European Commission is not only enhancing the resilience of the financial sector to non-bank shocks, but also emphasising the importance of data-driven risk management practices, which are the bedrock for weathering financial storms.”
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