The European Banking Authority (EBA) has announced plans to investigate the interconnectedness of legacy banks with non-bank financial institutions (NBFIs). This joint investigation will be conducted in collaboration with the European Systemic Risk Board (ESRB) and the Financial Stability Board (FSB). The assessment will focus on understanding the potential for contagion between traditional banks and NBFIs, including hedge funds, private equity firms, and cryptocurrency platforms. The investigation aims to trace the underlying chain in NBFIs to gain insights into the scale of potential risks in stressful situations.


Key Points:

  • Interconnectedness Assessment: The EBA, ESRB, and FSB will conduct a joint investigation to assess the interconnectedness between legacy banks and non-bank financial institutions (NBFIs).

  • Scope of Investigation: The investigation will specifically include an assessment of hedge funds, private equity firms, and cryptocurrency platforms to understand the potential for contagion and risks in stressful situations.

  • Underlying Chain in NBFIs: José Manuel Campa, the chair of EBA, emphasized the need to trace the underlying chain in NBFIs to gain a comprehensive understanding of their interconnectedness with traditional banks.

  • Data Challenges: Campa highlighted the challenges in obtaining quality and homogenous data related to NBFIs, describing the sector as an "obscure sector" with varying data quality.

  • FSB Estimate: According to the Financial Stability Board's estimate, NBFIs hold assets close to $218 trillion, constituting approximately 46% of total global assets. In comparison, traditional banks hold around $183 trillion.

  • Previous EBA Initiatives: The EBA had previously proposed new industry guidelines for anti-money laundering and combating the financing of terrorism (AML/CFT) in the crypto sector in November 2023.

Conclusion: The joint investigation by the EBA, ESRB, and FSB into the interconnectedness between legacy banks and non-bank financial institutions reflects the regulators' commitment to understanding potential risks and contagion in the financial system. The assessment will cover a range of NBFIs, including hedge funds, private equity firms, and cryptocurrency platforms, with a focus on tracing the underlying chain to enhance regulatory insights and address challenges posed by the "obscure sector" of NBFIs.


(DAVID ATTLEE, COINTELEGRAPH, 2023)