By Sinead Cruise, Tommy Reggiori Wilkes and Huw Jones
LONDON (Reuters) – Regulators seeking to identify the risks of the booming non-bank financial sector face “black holes” that can only be addressed by mandatory disclosure, the chairman of Europe’s banking watchdog told Reuters, pointing out a process that could take years.
According to the G20 Financial Stability Board (FSB), non-bank financial institutions, including hedge funds, private lenders and insurers, accounted for $218 trillion in 2022, or just under half, of the world’s financial assets.
The rapid expansion of the so-called ‘shadow banking sector’ is a growing priority for regulators, who are concerned about the lack of transparency and the extent to which the problems could threaten the resilience of broader financial markets.
European Banking Authority Chairman Jose Manuel Campa said he feared much of the ecosystem could remain out of sight of global watchdogs, making “some kind of reporting requirements” for shadow banks a potential “next step.”
“My feeling is that during the mapping we will have problems identifying the information. There will be black holes because there are no regulatory reporting requirements at this stage,” Campa said in an interview with Reuters.
Building reliable and comprehensive data is critical to advocating for new rules for non-bank lending. Private lenders are increasingly the main financiers of companies that have difficulty raising money from regular banks.
Research from the Alternative Credit Council (ACC) estimates that private credit fund managers lent an estimated $333 billion in 2022, a 60% increase from the $200 billion disbursed in 2021.
But the collapse of private investment fund Archegos Capital Management in 2021 illustrated how deeply the core banking system could suffer from problems at non-banks, causing major losses at ill-fated lender Credit Suisse.
Understanding banks’ direct exposure to non-bank counterparties was relatively straightforward and the size and type of these exposures had not raised any concerns until now, Campa said.
But regulators tended to lose track as they tried to follow that money further and learn more about what private lenders were doing with capital borrowed from regulated banks.
“I think it’s much easier to do business with large asset managers or large private equity funds than with some of these hedge funds that are more private. This is a very diverse ecosystem,” Campa said.
Regulators have said it could take some time before final decisions are made on how to supervise non-banking activities, with global consensus needed to implement international rules for such a cross-border industry.
The FSB plans to release the findings of a large-scale exercise later this year to collect data on non-banks and their links with regulated lenders, while the Bank of England is also trying to build the case for new rules based on findings from the first sector. -wide stress test.
FSB Secretary General John Schindler said in December that regulators would like to outline policy proposals on tackling shadow bank leverage by late 2024 or early 2025.
“What is delivered by the end of the year will be better than what we have,” Campa said.
