ECB warns of damage to major European banks if funds fail. On Tuesday, the European Central Bank cautioned that if funds, insurers, and clearing houses withdrew deposits or fell into problems, the euro zone’s major banks might suffer.
The ECB studied the potential of spillovers from shadow banks—funds and other financial businesses that provide funding—to traditional lenders and vice versa.
It discovered bank assets, such as loans, and liabilities, such as deposits, were concentrated in the euro zone’s top 13 lenders, including its eight globally prominent institutions.
Shadow banks withdrawing money and repurchasing agreements were the largest concern. These represent 13% of traditional banks’ liabilities or more for larger banks.
If shadow banks—known as non-bank financial intermediaries (NBFI) by regulators—experience outflows or lose faith in a bank, this may happen.
“This funding may be highly sensitive to the credit quality of the recipient banks and can amplify the funding pressures faced by banks if the soundness of their fundamentals has been called into question,” the ECB stated.
The ECB said compulsory asset sales by shadow banks would hurt regular banks since their portfolios overlap or are interconnected.
Shadow banks would likewise suffer from systemically important lender distress.
“If one or a group of such (banks) were to become distressed, there would probably be substantial ramifications in terms of the ability of significant parts of the NBFI sector to manage liquidity and market risks,” the ECB stated.
The research used sensitive data from the ECB’s role as the euro zone’s top financial watchdog and did not name any firms.
BNP Paribas, Deutsche Bank, BPCE, Credit Agricole, ING, Santander, Societe Generale, and UniCredit are the euro zone’s worldwide systemically important banks.
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