ECB’s Knot: Most of Potential for Ripple Effects in Financial System Is in Non-Banks

22 January 2025

ECB’s Knot: Most of Potential for Ripple Effects in Financial System Is in Non-Banks
Klaas Knot, governor of de Nederlandsche Bank, at the ECB’s Governing Council meeting in Ljubljana on October 17, 2024. Photo by Adrian Petty/ECB.

By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Klaas Knot said on Wednesday that most of the potential ripple effects in financial crises were in the non-banking sector.

In a panel at the World Economic Forum in Davos, Knot, who heads De Nederlandsche Bank, said that recent shocks in the financial system, like the Archegos case or the UK pension fund shock, had in common that ‘somewhere in this non-bank space, all of a sudden pockets of leverage pop up where we didn’t expect beforehand’.

It had been demonstrated that liquidity buffers in this sector were ‘inadequate at different moments in time’, he said.

‘Vulnerabilities will be there, shocks will be there’, he said. ‘But we have to make sure that they don’t have these strong ripple effect through the financial system.’

The majority of these potential ripple effects were still in the non-banking sector, he said.

‘If you look at all the shocks we had to weather in the last 15 years, most of them were clearly not anticipated and were coming from corners that we didn’t expect’, he said.

There was ‘a little bit of an unfinished business’ in the non-banking sector, but at the same time core banks had been able to weather recent turmoil in a positive way, he said.

 

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