FRANKFURT (Reuters) – Eurozone banks need to be more selective about customers who engage in risky financial market bets, such as hedge funds, and be more cautious about their exposure to these funds, the European Central Bank (ECB) said on Friday.
This warning from the ECB underscores the Frankfurt Institute’s concerns about non-banking financial institutions, which currently account for nearly half of the global financial system.
The development of the non-banking financial sector, valued at around $240 trillion according to the G20’s Financial Stability Board (FSB), accelerated after the global financial crisis as traditional banks came under stricter regulation.
Andrea Enria, the head of banking sector supervision at the ECB, on Friday urged banks to be more demanding of their non-banking clients such as hedge funds and trading companies that borrow from banks. traditional banks to engage in risky and less regulated activities.
For him, banks must say “no” when they deem an operation too risky.
“A client’s failure to provide information should result in a more conservative approach to guarantees, margins and limits, or even the rejection or exclusion of that client,” he wrote in a statement. blog.
Andrea Enria points out that the ECB has noted that the low interest rates (they were negative until July 2022, editor’s note) “encouraged certain banks to increase the volume of capital granted to more exposed and less transparent institutions, including non-banking financial institutions such as hedge funds and family offices.
THE ARCHEGOS EXAMPLE IN 2021
After the Archegos bankruptcy in 2021, which resulted in significant losses for Credit Suisse and other banks, the ECB conducted a review of risk management by eurozone banks on derivatives.
The Frankfurt institution also examined the links between banks and commodity traders as well as companies in the energy sector amid volatility in those markets following Russia’s invasion of Ukraine.
According to Andrea Enria, the ECB has since noted “some progress” but also “several significant shortcomings”, ranging from the amount of guarantees required by banks from their customers to the legal conditions of their contracts.
Andrea Enria assured that the ECB “would use the full range of supervisory tools at its disposal to ensure that the banks in question quickly remedy the shortcomings (noted)”.
The ECB can formulate so-called “qualitative” requirements, for example asking a bank to strengthen its controls, but also increase capital and liquidity requirements if it considers that its requests have not been taken into account.
(Reporting Francesco Canepa and Huw Jones; French version Claude Chendjou, editing by Kate Entringer)
Copyright © 2023 Thomson Reuters