The European Central Bank (ECB) considers that some parts of the non-banking financial sector, which includes investment and pension funds and insurers, “major security vulnerabilitiesHe emphasizes the need to strengthen the resilience of these assets from a macroprudential perspective, recommending that they be subjected to liquidity stress tests.
HE Financial Stability Report The ECB’s president, led by the institution’s deputy governor, Luis de Guindos, points out that institutions in the non-banking financial sector “must be subjected to appropriate stress tests” to assess liquidity risk in the face of margin and guarantee calls in adverse scenarios.
In this way, it recommends the development of guidelines, best practices and recommendations for the conduct of such stress tests and emphasizes that authorities should have a mandate in this regard. express authority to monitor the results and request measures from the audited organizations.
In the ECB’s opinion, when measuring liquidity needs As a result, at the entity level and systemwide, authorities and the entities themselves will be in a better position to assess the ability to meet margin and collateral requirements during periods of stress.
Additionally, conducting such stress tests should improve data available at the organizational level, serve as a disciplinary tool, and help strengthen organizations’ risk management and emergency planning functions; The results can also be used to calibrate other measures. like proper level liquidity reserves and diversifying liquidity sources.
In this sense, the Central Bank states the following: defining feature Things to consider to increase the resilience of the sector leverage restrictions Including setting specific leverage limits for different types of entities in the non-banking financial sector and/or using discretionary restrictions for types of entities exposed to similar risk.
The ECB notes that calibrating such limits will require assessing appropriate leverage levels for entities, taking into account their particular business model, the economic benefits of such leverage, and the level of leverage-induced externalities that the financial system can support. “Stress tests may be informative in this situation.”
However, the agency recognizes that stress tests can consume many resources and therefore remains important to consider. proportionality when creating any approach to evaluation.
Other measures
“Given the increasingly important role played by the non-bank financial intermediation sector in financing the real economy, Interconnections with the banking system“It is important to address the sector’s vulnerabilities to improve financial stability and support monetary policy to achieve its objectives,” the central bank said.
In this way, in addition to the possibility of conducting stress tests, the ECB also proposes the obligation of institutions in the non-banking financial sector to conduct stress tests. emergency plans and effective governance practices to manage liquidity risks arising from margin calls or collateral.
This requires improving collateral management practices and credit lines. It will also allow authorities to check whether contingency plans are appropriate and calibrate certain liquidity measures accordingly.
Advances in this area will allow organizations to better assess and manage their situation. liquidity risks The ECB says it is derived from margin calls and guarantees.
Similarly, the institution is committed to ensuring that firms in this sector maintain sufficient levels of high-quality liquid assets or cash reserves to directly improve their ability to meet large guarantees and margins, thereby improving their profitability. Durability of the entire system.
On the other hand, the ECB argues that institutions in this class should diversify their liquidity sources both between asset classes and within themselves and avoid concentration on a particular type of guarantee, and on the financing side, they should diversify their liquidity sources.Excessive concentration of counterparties in credit and repo lines.
“Demand diversification” sources of liquidity “It should increase the resilience of organizations in response to generalized liquidity shocks,” he notes.