MNI POLICY: ECB's Lane Points To Non-Bank Systemic Risk

By Luke Heighton

     FRANKFURT(MNI) - A "playbook" is lacking to address systemic risks in the

non-bank financial sector, despite an increased appetite for higher-risk

financial assets due to ageing populations, rising incomes and increased

reliance on private pensions, the Governor of the Bank of Ireland said on

Tuesday.

     Here are key points from a speech in Madrid given by Philip Lane, a lead

contender to replace Peter Praet as the European Central Bank's chief economist:

     --There is an established playbook for addressing systemic risks in the

banking sector both through macroprudential policies and provision of liquidity,

as well as through resolution and restructuring policies. "No such playbook

exists for tackling financial stability risks in non-bank intermediation

systems."

     Meanwhile, encouraging higher standards in liquidity stress testing is a

crucial tool for regulators. Lane welcomed additional proposals by the ESRB to

extend the collection of data from undertakings for collective investment in

transferable securities (UCITS) and to pay particular attention to those of

funds, which invest in the least liquid assets.

     Effective counter-cyclical tools are not currently available in relation to

liquidity. "We do have an important tool in Europe in relation to leverage,

where we can intervene to cap leverage if it is becoming significantly risky."

     While there has been progress in sharing information on the exposures

embedded in globally-significant banks, no such information-sharing mechanism is

available for non-bank intermediation chains.

     --Rules-based investment strategies "are less passive than in the past and

their likely behaviour in stressed market conditions has become more difficult

to predict. Greater concentration in key roles and less predictability of flows

in periods of stress are overall themes."

     --The open nature of most funds means that they are capable of experiencing

a run; the historical record of low propensity to run "is not as reassuring as

it might once have been, given the patterns of change both in the scale and

structure of the sector."

     --International regulators need to ensure that consumer protection

frameworks are sufficiently broad so that consumers are protected regardless of

the identities or locations of the firms providing financial services to

households.

     --Disruption in market-based financial intermediation "could also trigger

instability in banking systems."

     The rise in non-bank financial intermediation further reinforces the

importance of both banking union and capital markets union in the eurozone.

     Lane also said that financial integration is "the most effective strategy

to obtain the benefits of a diversified financial system that is populated by

robust intermediaries (both banks and non-banks), while safeguarding financial

stability."

     --The pull back of some domestically-focused banks from international

financial activity "may provide a buffer in the event of an international

financial shock to the extent that entities that are shut out of international

funding markets can turn to the domestic financial system as an alternative

source of funding."

     --A banking crisis is likely to be milder "if there are circuit breakers

that weaken doom-loop dynamics between a weak banking sector and a weak real

economy."

--MNI London Bureau; +44208-865-3829; email: Jason.Webb@marketnews.com

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