EU watchdog warns of data ‘black holes’ amid efforts to uncover shadow bank risk

By Sinead Cruise, Tommy Reggiori Wilkes and Huw Jones

LONDON (Reuters) – Regulators seeking to map out risks from the booming non-bank financial industry face information “black holes” which might only be fixed by mandatory disclosure, the chairman of Europe’s banking watchdog told Reuters, pointing to a process that could take years.

Non-bank financial institutions, including hedge funds, private credit providers and insurers accounted for $218 trillion, or just under half, of the world’s financial assets in 2022, according to the G20’s Financial Stability Board (FSB).

The so-called “shadow banking” sector’s rapid expansion is a growing priority for regulators, who worry about its lack of transparency and the degree to which its problems could threaten the resilience of broader financial markets.

European Banking Authority Chairman Jose Manuel Campa said he feared much of the eco-system could remain out of sight of global watchdogs, making “some kind of reporting requirements” on shadow banks a potential “next step”.

“My sense is that as we map, we will have difficulties identifying the information. There will be black holes because at this stage, there are no regulatory reporting requirements,” Campa said in an interview with Reuters.

Building up reliable and comprehensive data is crucial to making the case for new rules governing non-bank lending. Private credit lenders are increasingly the go-to financiers of companies that struggle to raise money from mainstream banks.

Research from the Alternative Credit Council (ACC) estimates that private credit fund managers lent an estimated $333 billion in 2022, up 60% from $200 billion disbursed in 2021.

But the 2021 collapse of private investment fund Archegos Capital Management illustrated just how deeply the core banking system could suffer from troubles stemming at non-banks, causing big losses at ill-fated lender Credit Suisse.

Understanding banks’ direct exposure to non-bank counterparties was relatively easy and the size and type of these exposures had so far given no cause for alarm, Campa said.

But regulators tended to “lose track” when they attempted to follow that money further and learn more about what private lenders were doing with capital borrowed from regulated banks.

“I think that engaging with major asset management companies or major private equity funds is much easier than engaging with some of these hedge funds that are more private. This is a very diverse ecosystem,” Campa said.

Regulators have said it may be some time before firm decisions on how to supervise non-bank activity are made, with global consensus necessary to implement international rules for such a cross-border industry.

The FSB later this year plans to reveal the findings of a massive exercise to gather data on non-banks and their ties to regulated lenders, while the Bank of England is also seeking to build a case for new rules based on findings from its first sector-wide stress test.

FSB Secretary General John Schindler said in December that regulators were aiming to sketch out policy proposals on tacking leverage used by shadow banks by the end of 2024 or early 2025.

“What is delivered towards the end of the year will be better than what we have,” Campa said.