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ECB's Knot calls for stricter regulation of shadow banking

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ECB's Knot calls for stricter regulation of shadow banking
FILE PHOTO: Klaas Knot, President of the De Nederlandsche Bank, attends the 2016 Institute of International Finance (IIF) Spring Membership meeting in Madrid, Spain, May 25, 2016. REUTERS/Susana Vera/File Photo   -   Copyright  Susana Vera(Reuters)
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AMSTERDAM (Reuters) – The rise of non-bank financing is creating a major risk for financial stability in the euro zone and needs to be better regulated, European Central Bank board member Klaas Knot said on Monday.

“Non-bank financial intermediaries provide a high and increasing share of financing in the high-yield debt market,” Knot, president of the Dutch central bank, said in a speech in Amsterdam.

“Should conditions deteriorate, such financial intermediaries are directly exposed to considerable potential losses. And perhaps even more important, there could be system-wide spillovers beyond the high-yield debt markets.”

Stricter regulation of the so-called shadow banking sector could mitigate risks, Knot said, pointing at rules for mortgage lending in the Netherlands that apply to banks and other lenders alike.

“If we conclude that … excessive debt and leverage of non-financial counterparts are actually the main drivers of risk, we could also look for instruments that aim to address these directly, such as borrower-based regulation.”

Knot was last week appointed vice chair of the Financial Stability Board (FSB), a body that has been coordinating new banking rules for the Group of 20 economies since the global financial crisis a decade ago.

(Reporting by Bart Meijer; Editing by Kevin Liffey)

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