February 12, 2024 - The European Commission, the government body responsible for drafting legislative proposals adopted by the European Parliament and European Council, recently published a report on its macroprudential review for banks, the systemic risks relating to nonbank financial intermediaries (NBFIs) and their interconnectedness with banks. The review, which was required under the European Union’s Capital Requirements Regulation, was conducted in consultation with the European Banking Authority (EBA) and the European Systemic Risk Board (ESRB).

In the report, the Commission notes that due to the lack of a common macroprudential framework governing NBFIs in the EU (and to address certain emerging risks in important NBFI sectors), it will run a consultation on macroprudential policies for NBFIs in 2024. The consultation will aim to collect further insights into the business models of key NBFIs and the interconnectedness among them and between banks and NBFIs. Further, it will seek to identify gaps in the macroprudential framework and other factors that may contribute to the build-up of systemic risks in nonbanks. The consultation will support any policy decision that the new Commission (which will be shaped by the European elections this June) may make regarding NBFI governance.

While the consultation does not necessarily portend new regulation, it does strengthen the sense of expectation for nonbank regulation given similar exercises from other regulators globally. Moreover, it shows that regulators are focused on the same areas to assess the linkages of NBFIs to the broader financial system, suggesting there could be global coordination in any potential future regulation.

As the report points out, the Financial Stability Board (FSB) and the ESRB have previously identified three structural vulnerabilities of NBFIs that contribute to the build-up of systemic risk but are only partially covered by macroprudential policies today: systemic liquidity mismatches, excessive leverage and interconnectedness within NFBIs and of the NFBIs with the banking sector (see the respective 2022 publications here and here). These vulnerabilities have also been highlighted by the International Organization of Securities Commission (IOSCO) in its September 2023 Final Report on Emerging Risks in Private Finance (which we discuss here) and the Financial Stability Oversight Council (FSOC) in its 2023 Annual Report.

Notably, the reference to nonbank systemic risk by FSOC appears more neutral than the other regulatory bodies. FSOC notes that while their vulnerabilities are important to monitor, NBFIs have long been a feature of the U.S. financial system and include a diverse set of institutions that are largely regulated or overseen by FSOC members.  

The LSTA will continue to monitor developments in the consultation.

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