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MNI POLICY: ECB Should Consider Regulating NonBanks - De Cos

By Luke Heighton
     FRANKFURT (MNI) - European policymakers should revisit the regulation and
supervision of the non-banking financial sector, the governor of the Bank of
Spain said on Thursday, saying that risks associated with non-bank
intermediaries' financial activities are "gradually becoming more systemic."
     Here are other key points from the speech in Madrid, in which Pablo
Hernandez de Cos said some segments of the non-bank financial sector exhibit
"particularly high levels of vulnerabilities, similar to those witnessed before
the crisis":
     -- After some stabilisation in Q3, latest euro area data shows that
activity remains "subdued and fragile," de Cos said, with 0.1% GDP growth in Q4
and with French and Italian growth rates in negative territory. "In this
context, monetary policy is expected to remain highly accommodative for a
prolonged period of time"
     -- The coronavirus outbreak in China - whose negative impact on the global
economy is still difficult to estimate - has compounded other geopolitical
factors and vulnerabilities in emerging markets, keeping the balance of risks on
the downside.
     -- European banks should step up their efforts to adapt their business
models in order to become more profitable. But, de Cos said, even though
"caution is required when drawing a simplistic and causal relationship between
low profitability and monetary policy [...] we cannot ignore the possibility
that, if persistent enough, such a scenario may ultimately impair bank
profitability and the bank-based transmission of monetary policy."
     -- New technological developments, including algorithmic and high-frequency
trading, pose a "significant" challenge for financial stability because they may
increase the probability of flash crashes and intensify the procyclicality of
financial markets. They should be closely monitored.
     -- Some 'stablecoin' initiatives have become an emerging source of concern,
due to their recent drive towards global scale and the increased complexity of
their respective ecosystems and the underlying stabilisation mechanisms.
     -- The financial sector will be in a better position to cope with the
consequences of climate change if these are properly accounted for, while the
proper pricing of these risks will help to efficiently channel resources needed
to make the economy more sustainable.
     -- The UK's official departure from the European Union underlines the
importance of finalising the construction of the Banking Union, and the
development of a genuine Capital Markets Union, of which the creation of a
common safe asset for the euro area may be a cornerstone.
     -- Other new risks are emerging: from cyber-risks and risks related to
crypto-assets to misconduct and legal risks, physical and transition risks
associated with climate change, and risks related to regulatory arbitrage.
--MNI Frankfurt Bureau; +49-69-720-146; email:
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$X$$$,M$$EC$]

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