Taking a system-wide approach to assessing the adequacy of the macroprudential framework for non-bank financial institutions in the EU

Speech by Francesco Mazzaferro, Head of the ESRB Secretariat, at the Exchange of views of the Committee on Economic and Monetary Affairs of the European Parliament

Brussels, 19 March 2025

Thank you for inviting me to this public hearing on assessing the adequacy of the macroprudential framework for non-bank financial institutions in the EU.

The financial landscape is highly interconnected. The activities of banks and non-banks are linked to such a degree that they rely on each other for their effective functioning.

Many activities that used to be the preserve of banks are increasingly being performed by non-banks. This includes market making, and even lending. Conversely, several EU banks have a strong focus on asset management as part of their business operations.

As the financial sectors become more integrated, two potential outcomes could emerge.

One potential outcome is that integrated markets allocate risks to places where they can be better managed, or where risks can be better absorbed if they do materialise. This could enhance the overall resilience of the financial system.

The other potential outcome is that integrated markets become a channel of contagion, where financial shocks are amplified and propagate, affecting various entities and markets. This could threaten the stability of the entire system.

The challenge is to maximise the benefits of efficient risk allocation while mitigating the potential for contagion and risk amplification.

The European Systemic Risk Board (ESRB) is trying to do this by taking a system-wide approach to regulation. This approach emphasises comprehensive oversight across the financial ecosystem by concentrating both on financial entities and on their activities, regardless of whether they are banks or non-banks.

A key aspect of this approach is that it considers vulnerabilities and risks in a way that is tied to the business model of each type of entity. Our approach thus debunks the myth sometimes propagated by the industry that regulators are trying to impose banking regulation on non-banks. We are well aware of the diversity of the financial system and the differences between banks and non-banks.

The ESRB has applied this system-wide approach to three activities that involve both banks and non-banks: asset management, clearing and lending. More work needs to be done, but we can already see a case for enhancing transparency in asset management activities, incentivising the central clearing of government bond cash and repo markets, and enabling authorities to set borrower-based measures and exposure concentration limits for highly indebted firms, regardless of whether the lending is provided by a bank or a non-bank.

More immediately, it is important that this Parliament helps close the gaps in the regulatory framework for non-banks. I will highlight four of these.

First, urgent regulatory action is needed to finally address risks in money market funds. It is particularly important to remove features that can incentivise runs.

Second, it is important to build on the progress made in addressing vulnerabilities in investment funds. This includes mitigating risks associated with excessive leverage, including in places where we might not expect it, such as in certain undertakings for collective investment in transferable securities (UCITS) known as “alternative UCITS”.

Third, there is a need to ensure liquidity preparedness for margin calls among participants in derivatives markets. International bodies, such as the Financial Stability Board, have made several recommendations on margin preparedness that should find their way into EU law.

Fourth, I would observe that in many respects crypto-assets and related activities mirror traditional finance. One example is stablecoins, which share certain design features with money market funds. For this reason, the regulatory perimeter for crypto activities needs to be clarified. The Markets in Crypto-Assets Regulation has laid the groundwork for regulating parts of the crypto market, but some activities and related risks remain unregulated in segments of the crypto markets and the classification of crypto-assets is not harmonised across Member States.

I would like to close with two points that are of particular importance in ensuring that the savings and investment union becomes a success.

First, there is a need to assess and work on the conditions for enabling the European Supervisory Authorities to supervise the most systemically relevant cross-border actors in financial markets.

Second, it is critical that authorities have the data they need. This can be achieved by removing legal obstacles to the sharing of granular data between authorities, while also reducing reporting requirements for firms.