The European Central Bank cautioned on Tuesday that the top banks in the eurozone may suffer if their financial clients, including funds, insurers, and clearing houses, withdrew their deposits or experienced other difficulties.
The ECB investigation examined the possibility of spillovers from so-called shadow banks to regular lenders, including funds and other financial firms that offer finance in one way or another.
It was discovered that the exposure was concentrated among the top 13 lenders in the eurozone, including its eight globally significant banks, in terms of both bank assets, such as loans, and liabilities, such as deposits.
It concluded that the main risk was that shadow banks would withdraw money from banks, including deposits and repurchase agreements. These make up 13%, or even more in the case of larger banks, of all traditional banks’ liabilities.
This might occur if the shadow banks, also known as non-bank financial intermediaries (NBFI) in regulatory speak, have their own cash outflows or lose faith in a bank.
The ECB warned that this funding “may be highly sensitive to the credit quality of the recipient banks and can magnify the funding pressures faced by banks if the strength of their fundamentals has been questioned.”
The ECB stated that other spillover channels included shadow banks’ forced asset sales, which would result in losses at conventional banks because their portfolios frequently overlap or are connected.
It further stated that problems at systemically significant lenders would also affect shadow banks.
“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 ECB did not name any companies in the report, which was based on sensitive information it acquired in its capacity as the top financial supervisor for the eurozone.
BNP Paribas, Deutsche Bank, BPCE, Credit Agricole, ING, Santander, Societe Generale, and UniCredit are the worldwide systemically important banks for the eurozone.
