Under the so-called shadow banking umbrella, everything from crowdfunding platforms to private equity funds, venture capital and even real estate vehicles coexist. They assume credit risk, but they are not banks. That is why it is more accurate to refer to the non-bank financial sector. According to BIS data, these intermediaries account in Europe for almost 40% of total assets in the financial sector (the figure is much lower in Spain), more than ten percentage points above pre-crisis levels. The position European authorities have maintained to date on this wholesale financing and on new competitors to banks is contradictory. On the one hand, they welcome the trend towards greater diversification of funding sources compared with bank lending. On the other hand, they warn of its rapid growth in a context where financial conditions are exceptionally loose and conducive to taking excessive risks.
Banks are subject to strict regulation on solvency and resolution, as well as conduct rules to ensure consumer and investor protection. Banking supervision is now far more thorough, which has helped banks to hold more capital and liquidity, and to have better risk control. Consolidation among European credit institutions in recent years contrasts with the strong dynamism shown by the non-bank financial sector. In many cases, these are intermediaries that compete with banks without being subject to the same strict regulatory requirements as banks. And there are reasonable doubts about their ability to manage the risks they assume appropriately or to offer the same level of customer protection that banks provide.
The main risk to banks from the strong growth of non-bank financing and new digital competitors is the contagion effect in scenarios of severe instability: stress and uncertainty in financial markets could become a risk for the financial system as a whole, although it does not appear to be a significant risk given the size of these non-bank intermediaries. In addition, banks are now much stronger, more stable and more resilient than before the crisis. Authorities have also learned to work in a coordinated manner internationally in difficult contexts that can jeopardize financial stability. What is striking here is that one of the potential triggers of instability is the process of monetary normalization. The sharp instability and market declines seen in the first days of February are a good example of this.
However, the economic fundamentals are solid. And banks have played a major role in this stronger-than-expected economic improvement. European banks cover more than 70% of the total financing needs of households and businesses, approaching 80% in the case of SMEs and households. Banks are necessary to maintain the flow of financing that the European economy requires. And the ECB knows it. Many of the non-traditional monetary measures applied during the crisis, such as medium- and long-term loans, had businesses and households as their ultimate beneficiaries. At the same time, banks are penalized with a negative interest rate for holding excess liquidity. The supply of official liquidity far exceeds the demand for creditworthy financing that banks can meet given their regulatory constraints on risk-taking.
It is important that our authorities continue to prioritize the financial stability achieved with so much effort. Achieving this depends on measures ranging from completing the banking union to the gradual normalization of monetary policy. These measures must be accompanied by greater certainty and regulatory balance for the financial system as a whole. And, of course, equal activities and risks must mean equal regulation and supervision. This applies to banks, of course, but also to the non-bank financial system.
José Luis Martínez Campuzano, AEB Spokesperson
