Euro-area lenders count on financial firms from outside of banking for about 14% of their funding — underlining how the industry is exposed to potential turmoil in sectors that aren’t subject to strict regulatory oversight.
(Bloomberg) — Euro-area lenders count on financial firms from outside of banking for about 14% of their funding — underlining how the industry is exposed to potential turmoil in sectors that aren’t subject to strict regulatory oversight.
Unsecured deposits make up the largest part of those liabilities, followed by debt securities and repo funding, European Central Bank researchers said in a report published Tuesday. The share of funding from such firms is higher and more diversified for larger banks than for smaller ones, they said.
Global authorities have increasingly debated whether and how to regulate the mass of financial firms previously known as shadow banks after strains at the start of the pandemic, the 2021 collapse of Archegos Capital Management and last year’s UK bond-market meltdown.
The researchers’ findings highlight the potential for contagion at a time when the collapse of several banks calls into question how truly prepared lenders are to withstand strain on funding as interest rates rise.
While deposits by so-called non-bank financial intermediation entities are small compared with those of banks’ corporate or retail clients, they “can be particularly vulnerable,” the ECB researchers wrote. About half of such deposits are unrelated to clearing, custody or cash management and can be withdrawn freely.
Banks may also need to replace funding from the repo market “very rapidly if the NBFI sector were to be hit by large, abrupt outflows,” the researchers said. Almost half of such funding to banks in the fourth quarter came from NBFI entities such as investment funds, with French, German and Dutch lenders the main recipients, they said.
Other findings ahead of Wednesday’s ECB financial stability report include:
- 13 large banks account for about 80% of euro area banks’ total repo borrowing from NBFI entities
- Euro-area NBFI entities hold 28% of outstanding bank debt securities and play a larger role in short-term market, including commercial paper with money market funds key investors
- Banks trade more than 20% of their gross notional derivative exposures with NBFI entities, mainly investment funds and other financial institutions
- The top five banks account for about 50% of total loan and securities exposure to NBFI, with the figure rising to more than 80% for the top 13 lenders
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