AMSTERDAM (Reuters) -Europe needs to tighten regulation of non bank financial firms to level the playing field with traditional lenders and to contain risk in a sector that has grown rapidly over the past several decades, ECB President Christine Lagarde said on Friday.
Non banks, such as investment funds, insurers and pension funds, sometimes called shadow banks, now have total assets worth about 350% of GDP but enjoy easier regulation than banks as they do not take household deposits.
“It is vital that policymakers adapt regulation and supervision to this challenging environment,” Lagarde said in a speech in Amsterdam.
“They should do so not by lowering standards for banks, but by levelling them up for non-banks that are involved in bank-like activities, or with significant links to the banking sector,” she said. “That helps to address banks’ concerns about the uneven playing field.”
Policymaker fear that in case of crisis, the central bank will be called upon to provide non banks with a liquidity lifeline given how deeply they are intertwined with regular banks.
“If risks were to build outside the banking system, beyond the current reach of regulators and supervisors, the trade-offs that were evident before 2008 may re-emerge, with monetary policy de facto being the only tool to ‘get in all of the cracks’ and rein in financial exuberance,” Lagarde said.
Europe should thus simplify regulation for banks without relaxing rules and should tighten them for non banks, Lagarde said.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)
