A Bank of England official is calling for more research into non-bank lenders.
This effort would help prevent a “credit crunch” that could result from a pull-back by hedge funds, pension funds, asset managers and insurers, Bank of England (BoE) deputy governor Sarah Breeden said Monday (Feb. 26).
“A shift in the willingness of market-based finance to lend to corporates, particularly those perhaps that are highly leveraged, would have significant implications for the real economy — a credit crunch sourced in market-based finance rather than bank lending,” said Breeden, whose comments at a BoE conference were reported by the Financial Times.
Adding that she was “particularly interested” in research that uncovered risks in the broader non-banking sector, Breeden said more research would help the central bank spot risks ahead of time.
“Assessing the risk in market-based finance is challenging,” Breeden said, noting the “complexity and interconnectedness of sectors.”
She also acknowledged that “activities markets and participants make it difficult to identify risks and predict how they might transmit through the system.”
The BoE is currently working on its inaugural review of how financial markets function under stress, dubbed its “system-wide exploratory scenario.” The assessment aims to examine 50 institutions to assess how they would respond to potential shocks.
Her comments come as “regulators are tightening their collective gaze on the risks of non-bank firms,” as PYMNTS wrote last year.
For example, the U.S. Treasury Department’s Financial Stability Oversight Council (FSOC) last fall announced it had created a new analytic framework for financial stability risks and updated guidance for non-bank financial company determinations.
“Financial stability is a public good, and we need a robust structure to monitor and address the build-up of risks that could threaten the financial system,” Secretary of the Treasury Janet Yellen said in a news release, PYMNTS reported in November.
And as noted here earlier this month, Federal Reserve data showed that American banks’ loans to non-deposit-taking financial companies now exceed $1 trillion.
Michael Hsu, acting head of the Office of the Comptroller of the Currency, told the FT recently he thought the loosely regulated lenders were driving banks to make lower-quality and higher-risk loans.
“We need to solve the race to the bottom,” Hsu said. “And I think part of the way to solve it is to put due attention on those non-banks.”