Shadow bank funding poses risks for large eurozone lenders, warns ECB

The European Central Bank has warned that the eurozone’s biggest lenders have been exposed to “spillover” of stress from outside the banking system, relying on so-called shadow banks for more than 15 percent.

The rapid growth of shadow banks – a conglomerate that includes insurers, hedge funds, asset managers and pension funds – has raised concerns about “liquidity, market and credit risks” to eurozone lenders since the 2008 financial crisis, according to the ECB. Said on Tuesday.

Central bank researchers found that nearly 80 percent of the 13 largest banks in the eurozone are sourced from shadow banks, or non-bank financial intermediaries (NBFIs).

“Any upheaval in the NBFI sector is likely to adversely impact large, complex, systemically important banks, as asset risk, funding linkage and derivatives risk are concentrated in this group,” officials said.

Global financial regulators have become concerned that rising interest rates and falling property prices in sectors such as commercial real estate could lead to serious tensions among shadow banks, which are more lightly regulated than lenders.

ECB vice-president Luis de Guindos last week proposed a number of ways to reduce rising risks in shadow banks, which he warned would prevent financial market shocks from triggering a wider liquidity crisis across the European Union. has left the union’s regulation “ever more inadequate”. ,

These concerns have increased since the collapse of family office Archigos Capital Management in 2021 after suffering huge losses after making risky bets on financial markets.

The biggest risk identified by the ECB, which examined relationships among 80 lenders and NBFIs, was that funds could be pulled out of the banking system during times of stress.

“Although small relative to retail and corporate deposits, deposit funding from NBFI institutions may be particularly vulnerable to changes in market conditions,” the researchers said.

Another channel of potential risk transmission is through banks’ derivatives trading, a fifth of which they do with shadow bank entities.

The ECB said that loan and other exposures to shadow banks account for about 9 percent of eurozone banks’ total assets. But it also said that many shadow banks were related to banks through partial ownership or sponsorship of special-purpose vehicles.

Shadow banks account for about 28 percent of all debt securities issued by eurozone lenders.

The report came after the ECB published it separately monthly data It shows how concerns about higher interest rates and rising risks continue to hold back bank lending in the eurozone.

Overall bank lending to eurozone households grew at an annual rate of 2.6 percent – the lowest monthly rate for six years. Business loans grew at an annual rate of 3.8 percent — the slowest pace for more than a year.

Bank deposits continued to decline, albeit at a slower pace, with monthly outflows of €18 billion, as outflows from overnight deposits were partially offset by money inflows into fixed deposits of up to two years.