ECB’s Knot: Need Cross-Border Approach to Non-Bank Financial Intermediation

13 September 2024

By Isabel Teles – FRANKFURT (Econostream) – European Central Bank Governing Council member Klaas Knot on Friday said that non-bank financial intermediation (NBFI) faced challenges that needed to be addressed from a cross-border perspective.

In a speech at the Eurofi Financial Forum in Budapest, the text of which was posted on the website of De Nederlandsche Bank, which he heads, Knot said, 'The NBFI sector is global in nature. As such, implementation needs to happen at the same time and with a sufficient degree of consistency across all major jurisdictions – to avoid cross-border fragmentation and regulatory arbitrage.'

The structural vulnerabilities faced by NBFIs, particularly related to liquidity mismatches, could spill over the rest of the financial system, he warned.

‘When similar financial entities – particularly investment funds – with similar investment strategies, sell similar assets, with a similar timing, asset prices may fall and a vicious downward spiral of further falling prices and forced selling may ensue', he said. 'Subsequently, stress may spill over to other parts of the financial system, either directly to counterparties, for example when leverage is involved, or indirectly through mark-to-market losses on common asset exposures.'

Authorities and market participants should increase their risk monitoring frameworks to improve resilience to vulnerabilities, he said, emphasising the importance of sharing relevant information.

'It is therefore necessary to keep a close eye on any initiatives to solve data-related challenges', he said. 'And European authorities should take a supportive role on the global stage to make progress, especially in sharing data.'