Stress tests of nonbanks needed to address their growing risks, ECB official says

31 May 2019 9:51pm
“Nonbanks are subject to lighter regulatory constraints which in some cases allow them to take on more risks,” he said at a London event* last week. “If risks were to unwind in a disorderly manner, we could see funding flows dry up, and funding conditions in the real economy affected more broadly.”

De Guindos cited nonbanks’ increasing share of market-based financing, also known as shadow banking, in which bond funds, hedge funds, insurers, pension funds and private equity firms engage in short-term wholesale funding.

This activity encompasses leveraged loans, or high-yield loans to heavily indebted companies.