Following recent market disruptions such as the COVID-19 pandemic and the UK gilt market crisis, the European Commission is reviewing the adequacy of macroprudential policies for non-bank financial intermediation (NBFI).
In July 2024, they launched a consultation to determine whether the EU should repurpose specific micro-prudential instruments or introduce new macroprudential requirements.
In its response, EFAMA stressed that Europe needs more holistic and rigorous analyses to determine where financial stability risks lie in the system before developing new macroprudential policies for capital markets.
While the discussion is undoubtedly important, it also comes at a critical juncture when the EU is trying to grow its capital markets and develop innovative solutions to address pressing societal challenges such as the pension and climate finance gaps.
The consultation is officially about NBFI, however the main focus is unfortunately on asset management. Investment funds have proven resilient thanks to a robust existing regulatory framework. The recent UCITS/AIFMD review, which entered into force in April 2024, will further increase the sector’s resilience, introducing mandatory liquidity management tools, leverage limits for private credit funds, and additional reporting requirements.
Building on these premises, EFAMA makes the following recommendations to address some of the Commission’s concerns around risks in capital markets:
• Focus the policy discussion on capital markets rather than on the illusive ‘non-bank financial intermediation’ category.
• Develop an accurate analytical framework to identify potential pockets of risk that require further attention.
• Foster EU macroprudential supervisory capabilities, including through better data exchange among banking, insurance, and securities supervisors. Insufficient data sharing among these authorities results in insufficiently rigorous financial stability analyses.
• Introduce targeted capital market reforms by i) developing a consolidated tape for fixed-income securities and equities, ii) broadening the range of collateral that can be used to settle variation margin calls in centrally cleared markets, and iii) relieving constraints on dealers’ balance sheets during periods of stress.
• Resist introducing macroprudential measures to ensure that markets behave counter-cyclically during periods of stress (e.g., by tinkering with liquidity buffers).
Tanguy van de Werve, EFAMA director general, said: “Whether it is the growing pension gap or the environmental transition, Europe faces many unprecedented challenges. Asset management is part of the solution. We channel monies in a vast array of asset classes, from equities to fixed income to infrastructure, that will require additional investments in the coming years.
“However, for this to succeed, macroprudential authorities must accept that capital markets are different from, and inherently more volatile than, the banking market and avoid applying bank-like regulation to our industry. Their policies need to be fit for purpose and not redundant.”
Marin Capelle, EFAMA regulatory policy advisor, said: “Recent market disruptions have demonstrated that we need to apply a holistic lens when assessing financial stability. Unfortunately, many authorities continue to approach the topic with pre-determined and narrowly focused outcomes in mind, which prevents them from asking the right questions.”
