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15 September 2018

Bloomberg: ECB's Villeroy sees risks from shadow banking, emerging markets

Supervisors need to keep a close eye on shadow banking and emerging market debt a decade on from the fall of Lehman Brothers, Bank of France Governor Francois Villeroy de Galhau said.

As banks have pulled out of riskier businesses since the financial crisis, specialized investors have stepped in to swell the European Union’s shadow-banking system to more than 42 trillion euros ($49 trillion) in assets at the end of 2017, or about 40 percent of the bloc’s financial system, according to the European Systemic Risk Board.

“One of the main risks we have to look at today is outside the banking system, it’s what we call shadow banking, which has been less regulated,” Villeroy said, echoing calls by European Central Bank chief Mario Draghi. “It’s the big investment funds, they are partly American. We have to strengthen things in this area because it’s been a bit forgotten as regulation has been strengthened.”

The ECB Governing Council member also pointed to risks from emerging market debt, citing crises in Turkey and Argentina.

Asked if he saw a “risk of contagion,” the central bank governor said: “Today, we don’t see it. I think of China, where Chinese authorities have the means to act, but we have to be extremely vigilant: everywhere rising debt means rising risks.”

Villeroy added that one of the lessons learned from the financial crisis was the benefit of countries working together to find collective responses and warned against the opposite approach of every man for himself. This was symbolized by the protectionist “America First” policies of President Donald Trump, he said.

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