An Expanded Responsibility for the ECB in Overseeing Shadow Banks is Suggested by Enria

The assets of shadow banks, which include investment funds, hedge funds, and insurers, have accumulated to 51 trillion euros ($56.13 trillion). Despite being subject to less stringent regulation than conventional lenders, shadow banks pose an increasing risk to the stability of the financial system as a whole.

Due to the decline in commercial real estate valuations, property funds are currently at a heightened risk, whereas open-ended funds exposed to credit risk encountered severe liquidity stress in early 2020, amidst the market volatility that accompanied the emergence of the pandemic.

"There could be a great deal of concentrated exposure, liquidity mismatches, and excessive leverage," Andrea Enria said in a joint interview with Expansión, Handelsblatt, Il Sole 24 Ore, and Les Echos on Tuesday. "In my opinion, this would necessitate an extension of the regulatory environment."

"Of course, the prudential supervisor could assume this duty," said Enria, who is resigning at the conclusion of the year. "These are different animals to banks, so we shouldn’t expect to supervise them in the same way as we supervise banks."

Taking on the supervision of shadow banks would necessitate legislative changes, which is a protracted endeavour even in ideal conditions, and would also demand widespread political support.

There are, however, those who contend that such a modification could alleviate liquidity strain, especially if shadow banks were granted access to the European Central Bank's lending operations.

With sufficient collateral, supervised lenders are now permitted to borrow from the ECB, thereby mitigating the risk that interbank markets seize up during times of duress.

By means of full allotment tenders, the ECB ensures that any cash demand is fulfilled at predetermined interest rates, contingent upon institutions furnishing the requisite collateral.