Shadow banks of Euro zone face risk related to margin calls, says ECB
The shadow banks of Euro zone face huge risk to receive huge margin calls and the client redemptions which they might not meet as they does not possess adequate cash available on hand, said ECB or European Central Bank on Wednesday.
Here, warning was the part of twice annual ECB review of Financial Stability, where it said that outlook for the funds, banks and companies, specifically in the real estate, stays to be "fragile" as the rates of high interest that took to be increasingly toll and quite hefty on this economy.
However, ECB said that liquidity buffers clearly among the shadow banks - the umbrella term which is for the funds, insurers as well as different NBFI non-bank financial intermediaries that was "very low", which helps to expose them to risk related to running out the cash at times related to the market stress.
"Provided that liquidity buffers in sector of NBFI stays to be quite low, sudden set of investment with fund outflows, large set of margin calls and also lapsing of the insurance policies can even lead to the forced sales of asset, that will also amplify the downward level of pressures in the financial markets.
In specific, the ECB which is found with various bond funds does not possess adequate liquid assets which could simply withstand almost 30 days of the severe outflows, with proportion of the highest among the high-yield funds along with the emerging-markets.
Moreover, the Insurance companies along with pension funds which also known as ICPF use the set of derivatives that could be also exposed to risk related to "large margin calls", added ECB, citing these who have suffered with the UK peers previous year as the precedent.
"The sharp increase related to the sovereign bond yields and also the high spike in the financial market and its volatility may expose the ICPFs that use the rate of interest and derivatives to some great margin calls," says ECB.
Moreover, central bank has also reiterated for the call to introducing the set of regulation to the shadow banks such as one which help to governs the traditional lenders, that includes liquidity requirements along with the stress tests.
Apart from this, it is said that the funds which invest in the real estate must not provide the clients with redemptions and the fund managers that invest in the assets which become illiquid during stress, must even be consider as long notice periods.