In its response to the Commission’s consultation on the macroprudential framework for NBFIs, Finance Watch identifies critical risks within the sector, including leverage, liquidity mismatches and regulatory gaps. While recognising the benefits NBFIs bring to market resilience and diversification, Finance Watch stresses the need for stronger oversight, comprehensive stress testing and climate risk to safeguard financial stability.
Non-Bank Financial Institutions (NBFI) now represent a substantial portion of EU financial assets, surpassing the banking sector with 41% of EU total financial assets. However, recent events, including the dash-for-cash in 2020 and the UK gilt turmoil in 2022, have highlighted the sector’s vulnerabilities. Finance Watch welcomes this consultation as an opportunity to address weaknesses in the macroprudential framework for NBFIs and enhance their resilience.
Finance Watch’s response highlights the need for more robust oversight to match the growing size and complexity of NBFIs. While the sector brings advantages, its potential to magnify systemic risks through leverage, liquidity mismatches and regulatory arbitrage cannot be overlooked. Finance Watch advocates for system-wide stress testing, better monitoring of NBFI-bank interconnectedness and enhanced transparency measures, especially for lightly regulated entities like family offices and private credit funds.
The response also emphasises the importance of incorporating climate-related risks into NBFI regulation to prevent these risks from migrating into less regulated areas. A comprehensive approach that mitigates systemic vulnerabilities while safeguarding the sector’s positive contributions is key to fostering financial stability, sustainable growth and the goals of the EU’s Capital Markets Union.
