The European Central Bank (ECB) published a report on large EU banks’ exposures to hedge funds. The report examines the significance of the financial links that have developed between large EU banks and hedge funds. Because of the important role that hedge funds play as participants in financial markets and as counterparties to financial institutions, especially banks, it has become increasingly relevant to monitor their activities and assess any implications for financial stability.
The survey showed that exposures of large EU banks varied across countries and generally were not large in relation to either bank’s balance sheets or total income. This is due, at least partially, to the fact that the global prime brokerage market is largely dominated by US firms. It seems probable that the absolute and relative size of exposures to hedge funds will increase further in line with the continuing expansion of the hedge fund industry, and in particular its European segment.
The survey indicated that recent developments in the hedge fund sector may not necessarily pose a direct threat to financial stability in the EU through banks’ direct exposures to hedge funds. The risk management guidance developed by supervisors and the capital adequacy regime provide an appropriate framework for dealing with risks resulting from EU banks’ interactions with hedge funds.