Top ECB official sounds alarm on rising risks from shadow banking

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Elizabeth McCaul says rapid growth of lightly-regulated lenders could translate into ‘systemic’ threat

A senior European Central Bank official has said the “remarkable” growth of private funds and other sources of finance outside the regulated banks is the biggest threat to the stability of the Eurozone’s financial system. “There are certainly caution lights in front of us,” Elizabeth McCaul, an ECB supervisory board member, told the Financial Times. “The most prevalent one is the area into which we likely have the least visibility and where things can move faster than . . .

She said Europe’s banking sector had “proven quite resilient in the face of some very significant challenges in the last few years,” after capital levels rose almost a quarter and non-performing loans shrank by two-thirds in the past decade. But the rise of shadow lenders reminded her of the collapse of US hedge fund Long-Term Capital Management in 1998 when she was superintendent of banks in New York. “You learn your lessons on the job,” she said. “I suspect correlation risk is occurring again.


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