VILNIUS: European regulators need a broader toolkit and should develop stress tests to tackle possible systemic risks coming from the shadow banking sector, ECB Executive Board member Vitor Constancio said on Friday.
Non-bank financial institutions such as insurance companies, pension funds and investment funds in equity markets are becoming increasingly linked to the wider financial sector, Constancio said in the text of a speech.
"The more policymakers are effective in using macroprudential tools to constrain excessive credit growth in the banking sector, the more likely it becomes that there will be excessive adjustments in the non-bank sector through leakages," Constancio said.
Policymakers need an expanded range of borrower-based tools to restrain excessive leverage and credit growth, he said.
"I would support developing guided stress tests designed by regulators themselves, which can shed light on the true loss absorption capacity of non-bank institutions," he added.
The stress tests would need to incorporate derivative positions and shadow banks' exposure to liquidity shocks, which would help give a more complete picture of the resilience of the financial system as a whole, he said.
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