EU plans sweeping stress test of non-banks
European Union
(EU) regulators are planning their first stress test to look for vulnerabilities in the financial system outside of banks, reflecting fears about the rapid growth of less regulated groups such as hedge funds and private equity.
The plans by European authorities to examine the impact on the wider financial system of a potential market crisis, which would also include pension funds and insurers, follow a similar debut exercise by the Bank of England last year.
Officials at the EU's main financial watchdogs are still discussing the details of such a system-wide stress test of non-bank institutions, but they are optimistic that it could be launched next year, according to two people involved in the talks.
The move is likely to raise serious concerns among hedge funds, private credit groups and money market funds that they could be subjected to greater scrutiny and restrictions by European regulators in the future.
READ MORE
Since the 2008 financial crisis, the provision of loans has shifted from banks' balance sheets towards other firms that behave like traditional lenders but are more lightly regulated.
Non-banks accounted for about a quarter of the total €19 trillion stock of loans in the euro zone at the end of 2023, according to the
European Central Bank
(ECB), which said 'more and more loans are being provided by insurance corporations and pension funds'.
[
Total bank losses from Archegos implosion exceed $10bn
Opens in new window
]
Supervisors are growing increasingly concerned about the opacity and potential risks these firms could present, as well as links back to the banking system. Lending by euro zone banks to such non-bank firms has tripled since 1999 to reach €6 trillion by the end of 2023.
Non-banks have been central to several episodes of market turmoil in recent years, including a dash-for-cash in bond markets after the pandemic hit, the collapse of family office Archegos Capital Management three years ago, and a liquidity crunch at energy traders after Russia invaded Ukraine.
'We're at a critically low level of housing stock' for buyers and renters
Listen |
33:06
'We've seen some crisis episodes . . . where liquidity risk spillovers came from the NBFI, non-bank financial intermediation space,' Claudia Buch, chair of the ECB's supervisory board, told the European Parliament in a recent hearing.
'So, it's important that this is also well understood and well regulated,' Buch said. 'So not all NBFIs are more risky than banks or other financial institutions, but we need to address the risks there in the right way and also the regulation needs to be targeted to those risks.'
EU regulators also worry that the region has been slow to tighten rules for money market funds, which are an important source of funding for banks, leaving them with lower minimum liquidity requirements than those in the US and UK.
Some national authorities in Europe have already announced they are planning to launch a similar stress test of so-called non-bank financial intermediaries (NBFI), including those in France.
The EU exercise would build on the specific sector-focused stress tests already carried out regularly for banks, insurance companies, money market funds and clearing houses in the 27-country bloc.
The aim is to examine how a crisis would spread between different parts of the financial system and whether this could magnify the shock rather than absorbing it.
Discussions have included the European Banking Authority, the European Securities and Markets Authority, the European Insurance and Occupational Pensions Authority and the ECB, as well as the European Commission and the European Systemic Risk Board. The regulators and the commission all declined to comment.
The commission said on Friday it would delay the implementation of tougher capital requirements for banks' securities trading businesses by a year until early 2027. The delay will allow Brussels to wait for clarity on whether the US will go ahead with the rules agreed by global regulators on the Basle Committee on Banking Supervision.
The Bank of England (BoE) involved more than 50 City of London institutions in its so-called system-wide exploratory scenario – which included the theoretical default of a hedge fund – to model how a period of stress would ripple through non-bank firms.
City firms were relieved when the BoE said resilience was 'comparatively high' in liability-driven investment funds in pension schemes, which had caused a crisis in gilt markets two years earlier.
But it also warned that fire sales of assets by pension funds, hedge funds and other investors could magnify a market crisis, especially as many had 'mismatched expectations' about their ability to raise cash in a meltdown. – Copyright The Financial Times Limited 2025
Hashtags
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
RTÉ News
3 hours ago
- RTÉ News
The EU's indictment of Israel in Gaza: the hard work begins
The review into whether Israel is in violation of its obligations under its trade relations with the European Union, due to its conduct of the war in Gaza, was shrouded in secrecy and hobbled by last minute timing. National capitals only got the assessment late on Friday afternoon - foreign ministers are supposed to give a detailed response at a meeting in Brussels on Monday. Diplomats complained about having little time to assess the review's contents. The less time they have, the more potential for a divisive debate at the Monday meeting. The paper was circulated not long before EU ambassadors were scheduled to meet to discuss it at 6.30pm Brussels time on last night. "Until a few days ago, we had no idea if it would be just an oral presentation," an EU diplomat said yesterday morning. "Now we have confirmation it will be a written report, which for us is extremely important. The value of a written report is greater." The review was ordered by the EU's Foreign Policy Chief Kaja Kallas after a majority of EU foreign ministers supported a Dutch proposal last month to assess whether Israel was in breach of the human rights and international humanitarian law obligations enshrined in Article 2 of the EU-Israel Association Agreement. The review was carried out by the EU's Special Representative for Human Rights. It essentially collated existing findings produced by a plethora of UN bodies. Yet, over seven pages it was a searing indictment of Israel's alleged failure to abide by human rights law, and the rules governing the protection of civilians during war, both in Gaza and the West Bank. It focused on Israel's complete blockade of any food, medicine and fuel entering Gaza for 11 weeks from 2 March, before Israel eventually permitted a "militarised" food distribution service which was accompanied by "deadly" shootings of Palestinians. Since the Hamas 7 October attacks, discrimination, oppression, and violence against Palestinians had increased in the West Bank, with a "significant increase in Palestinian fatalities" and attacks by Israeli settlers, accompanied by "sustained settlement expansion". There were road closures, checkpoints, and barriers that "permanently or intermittently restrict the movement of Palestinians across the West Bank." These increasingly undermined Palestinians' access to livelihoods, healthcare, education and other essential services. The "unprecedented level of killing and injury of civilians" in Gaza was "a direct consequence of the Israeli Defense Forces' (IDF) failure to comply with fundamental principles of [International Humanitarian Law]". The report said of the verified Palestinian deaths caused by attacks on residential buildings in Gaza, 44% were children - "mainly young children and babies." The fact that these deaths did not reflect the demographic of Hamas combatants "points to indiscriminate attacks." The use of heavy weapons, including airstrikes, on civilian shelters (including tent encampments and schools) "raise concerns about Israel's compliance with the principles of precautions in attack, and proportionality". Attacks on hospitals and medical centres in Gaza included "direct strikes, sieges, the use of snipers, raids, and the apparent arbitrary detention and ill-treatment of medical staff, patients and their companions, and internally displaced persons (IDPs) sheltering at hospitals", and the killing of many emergency medical workers. Israel had failed to comply with binding International Court of Justice (ICJ) rulings in early 2024 to provide humanitarian aid in Rafah "with a view to prevent the commission of acts within the scope of the Genocide Convention." And on the review goes… Needless to say, the report found that Israel's obligations under human rights and international law to protect civilians were in breach, as were its obligations under Article 2 of its agreement with the EU. Ireland and Spain first highlighted concerns last year that Israel was in breach of Article 2. The trenchant support for Israel by Germany, Austria, Hungary, the Czech Republic and others meant there was no consensus for a review to take place. That changed after the Israel-Hamas ceasefire collapsed in March and the IDF intensified its assault on Gaza, including the prolonged humanitarian blockade. Dutch foreign minister Caspar Veldkamp revived the Irish-Spanish initiative in April, and at a meeting of his counterparts in May, the pendulum swung in favour of action. 17 member states - including Ireland - supported a review of Article 2 compliance (two countries joined the list afterwards); sentiment at EU level was clearly shifting. Yet, the divisions remain. Despite last night's report, we are in for a protracted period of step-by-step diplomacy. Ms Kallas will canvas the views of 27 foreign ministers on Monday, and then brief EU leaders during their summit in Brussels next Thursday. Yesterday, diplomats were emphasising the need for unity. So sensitive is the Israel-Gaza issue, that a menu of options against Israel will be kept off the table for now. "There are those among the 17 (member states) who wanted the review but who don't actually want any measures against Israel to be taken," says a senior EU official. "They want to use this as a way of applying pressure to Israel. There are those who definitely want measures to be taken, and there are those who didn't even want the review in the first place." A senior EU diplomat, from a country in favour of the review, said: "It's clear what needs to happen: first of all, we want as broad agreement as possible on the outcome of the review. We know it will not be unanimous, it will not be consensual, but we hope that a big group of member states can subscribe to the conclusion of the review." That would, in theory, allow Ms Kallas to take the findings to the Israelis and use the threat of punitive measures to encourage Israel to massively increase humanitarian support and to move towards a ceasefire. Preserving unity next week will be challenging. When EU ambassadors had their first meeting on the forthcoming review on Wednesday, the divisions were already clear. "You could see the different positions of member states reflected in the more procedural interventions," says one diplomat. "The Irish, Belgians, Spanish and Slovenians were pushing for an immediate discussion among ministers about next steps and consequences, whereas others were fiercely pushing back on that: the Hungarians, the Czechs, the Germans and - to a lesser extent - the Italians." It is understood the Irish government initially wanted Ms Kallas to lean towards some kind of list of options the EU could take against Israel, now that it had been found in violation of Article 2. However, Dublin had apparently accepted the prevailing view that unity was vital and that the threat of further action could convince Israel to change its policy towards humanitarian aid, and towards a ceasefire. In this scenario, we would have to wait for a meeting of EU foreign ministers in July before Ms Kallas presents a range of options Europe could take. In a statement, Tánaiste Simon Harris welcomed the findings of the review. "Ireland has always been clear that any such review can only reach one conclusion – there is clear evidence that Israel is in breach of its obligations under Article 2 of the Agreement. We now expect the EU and its Member States to take concrete actions in follow up to the review." External events could also derail any consensus building. Diplomats stressed the need to keep the Article 2 issue separate from the Israel-Iran war raging in the background. "It's part of Israel's strategy to divert attention from what is happening in Gaza and in Palestine," says one diplomat. "That's precisely what we don't want. The situation in Gaza and Palestine is absolutely critical, and we need to keep a very strong focus on it." "On the Iran-Israel issue," says another diplomat, "some foreign ministers will make the point that given what's happening, perhaps we should hold off on the review, hold off on making this an issue in our conversation with Israel. I think we can walk and chew gum at the same time." There is also growing frustration - shared in Dublin - at those EU capitals which have emphasised quiet diplomacy with Israel. One source suggested that "whispering to the Israelis" had yet to deliver any meaningful response in 18 months of the Gaza war. Pressure is building elsewhere. This week, Belgian Foreign Minister Maxime Prevot spearheaded a joint letter - co-signed by Tánaiste Simon Harris, as well as the foreign ministers of Finland, Luxembourg, Poland, Portugal, Slovenia, Spain, and Sweden - calling on Ms Kallas to ensure that the EU is compliant with last summer's ruling by the International Court of Justice (ICJ) on Israel's occupation of Palestinian territories. The advisory opinion held that Israel's occupation was illegal, and that countries were obliged to ensure they did not support the occupation through trade. The Belgian initiative chimes with the Irish government's view that the ICJ ruling is binding on EU member states and that a ban on products from illegal settlements is effectively a legal obligation (ie, the legal impetus for the Occupied Territories Bill). Belgium expects other countries to join the call. A senior diplomat from one member state said his government was in favour of the Belgian initiative, but preferred not to sign the letter given that its recommendation - banning settlement products - was one of the "options" that could put pressure on fragile EU unity. The private view within the European Commission is that the EU is broadly in line with the ICJ ruling. However, the Commission has sent a number of legal opinions to the member state working group on international judicial affairs (COJUR). "The issue has been back and forth without any consensus," says a senior EU official. "It's never reached the political level, but it's been discussed by diplomats." The Belgian letter essentially calls for Ms Kallas - who represents both the Commission and member states - to speed the process up. It urges the Commission to bring forward measures to ensure that member states are in compliance, given that the "European Union is founded on the values as stated in the UN Charter, such as the respect for human dignity, freedom, democracy, equality, the rule of law and human rights…[and that] all EU Member States are parties to the Statute of the International Court of Justice." Whether the Commission will introduce new legislation to reflect the growing clamour - as reflected in the Occupied Territories Bill - for a ban on goods coming from illegal Israeli settlements remains to be seen. One source suggests that the Commission could provide for individual member states to make their own national arrangements. The fact that the review of Israel's conduct, for so long a disregarded Irish-Spanish gambit, has finally happened and does not pull any punches is, relative to the EU's tortuous policy on Gaza, an achievement. However, the length of time it has taken to hold Israel to account, and the fact that even now a punitive response could take several months, will further call into question the EU's moral backbone, with the death toll in Gaza standing at over 56,000, according to Palestinian authorities. The fact that the EU's role in foreign policy necessarily gives each member states a veto (foreign policy is normally a fundamental expression of national sovereignty) is of meagre comfort to those who believe Europe should have done more and done it quicker. Diplomats are increasingly frustrated that in the generational challenges of our time - Russia's invasion of Ukraine, and Israel's response to the Hamas October 7 attacks - the EU's voice has been blunted by division and national vetoes. In the event that Ms Kallas does provide a menu of responses to foreign ministers in July, it is by no means clear what happens next. The EU has never taken action against a trade partner for such a breach of a trade agreement. A full suspension of the Association Agreement would require unanimity, with a Hungarian, German and Czech veto almost certain. There has been speculation that suspending elements of EU Israel trade would only require a so-called Qualified Majority Vote (QMV). On the basis of the 19 countries which supported a review, that qualified majority could be reached. However, one EU official questioned whether even this would be possible. "Even suspending some trade could be seen as a sanctions measure, and that would therefore require unanimity," said the official. "We've also discussed a complete ban on trade with Israel, and that would be against our WTO obligations - so that is a non starter." For any measure to be taken it would require a proposal from the European Commission, meaning the issue runs - once again - straight into national divisions. On only two occasions in the history of the EU has an issue gone to a vote among the College of 27 commissioners (each from a member state) since the body strives for consensus. There is no doubt that attitudes to Israel have hardened, even among its traditional allies. Last month, the German Chancellor Friedrich Merz said in a TV interview: "What the Israeli army is doing in the Gaza Strip, I no longer understand the goal. To harm the civilian population in such a way … can no longer be justified as a fight against terrorism." Whether this pressure, which should be amplified by the publication of the review, makes any difference to Israel's conduct remains an open question.
Irish Times
4 hours ago
- Irish Times
Paschal Donohoe's refusal to tackle banker bonus ban is hitting those who bought State's shares
Paschal Donohoe's sale of the State's remaining shareholding in AIB this week will pave the way for a crisis-era agreement that governed the Minister for Finance's engagements with the bailed-out bank to be torn up within weeks. The relationship framework – tweaked in 2017 as Donohoe proceeded with AIB's initial public offering (IPO) just days into the job and his first stint in the role – gave the Minister the right to be given sight of business plans before these were adopted, consulted on any deal or investment worth more than €100 million and get prior notice of a senior executive appointment before it was announced. On remuneration, the document said that 'any incentive arrangements for directors and senior executives are closely related to their performance, measured by the achievement of relevant targets, such targets having regard to the achievement of the business plan'. It was a moot clause, of course. Bank bonuses above €20,000 have been in effect banned across rescued banks by way of a prohibitive 89 per cent supertax for the past decade-and-a-half. (Indeed, Donohoe only allowed for variable pay up to that level to be introduced in late 2022, after Bank of Ireland returned to full private ownership.) READ MORE Bank executive pay remains as politically thorny today as at any stage the financial crash – even if the State has now recovered, in nominal terms at least, just over the €29.4 billion pumped into AIB, Bank of Ireland and PTSB during the crisis. It continues to hold a 57 per cent stake in PTSB, which at present has a market value of €620 million, and stock warrants in AIB, estimated to be worth about €300 million. Donohoe confirmed to reporters on Tuesday, after selling the Government's last 2 per cent stake in AIB to stock-market investors, that he is lifting the €500,000 basic salary cap at AIB and PTSB. He argued that it was not appropriate for the Government to have a role in setting the pay at AIB and Bank of Ireland 'when we no longer own a single share in those companies'. Lifting the cap at PTSB is to prevent it being put at a competitive disadvantage when it comes to hiring and retaining executives. He's right. But the logic fell apart when he said that he had 'no plans' to remove the 89 per cent super tax on bonuses, knowing it is enshrined in law (the Finance Bill 2011) and requires legislation being passed through the Oireachtas. There are no votes in that. [ How AIB, once worth less than its art collection, came back from the brink Opens in new window ] To be clear, the long campaign by bankers to reintroduce bonuses was largely ham-fisted. It started off with a pitch by AIB's then chairman David Hodgkinson to the Department of Finance in early 2014 when the bank had barely returned to profit after the crisis, let alone start to repay its rescue bill. Arguing for a return of variable pay when the sector spent much of the next decade knee-deep in the tracker mortgage scandal was also tone deaf. But lines have been drawn under those. To see where AIB is now headed on the executive pay front, you only have to look at its main rival. Following the lifting of pay caps in Bank of Ireland in late 2022, its board came up within months with a plan to award its chief executive, Myles O'Grady , the equivalent of 25 per cent of his basic salary from 2024 by way of shares in the group, rising to 50 per cent this year. O'Grady was hired two-and-a-half years ago on a fixed salary of €950,000. With the stock awards set to soar to 100 per cent of salary next year, his total remuneration will top €2 million, when pension entitlements are also included. The fixed share bonanza, which have trickled down to other senior Bank of Ireland executives, means that top employees have skin in the game alongside other investors. The board, in fairness, has also decided that executives must now hold on to stock for five years after they are received, up from three years previously. And it argues the CEO's total package will remain about 60 per cent below the median maximum remuneration opportunity that heads of mid-tier UK banks and other top-10 Iseq companies enjoy. But the no-strings nature of the stock awards – to get around the fact that performance-related pay above €20,000 remains outlawed – is not ideal for investors who now hold the shares that the Government sold in the banks. It treats success, mediocrity and even underperformance as one and the same. It also flies in the face of carefully thought-out EU rules brought in after the financial crisis. These limit variable pay to 100 per cent of salary – or 200 per cent if explicitly approved by at least two-thirds of shareholders. These also include provisions for bonuses to be docked or clawed back when staff engage in risk-taking that causes losses later. The Irish solution to an Irish problem is even more incongruous when you consider that senior finance executives are now subject to one of the strictest individual accountability regimes in Europe – by virtue of rules that came into force almost 12 months ago.
Irish Times
4 hours ago
- Irish Times
Is it time for the Social Democrats to end Eoin Hayes's purgatory?
A little over six months ago, the Social Democrats came badly unstuck at a press conference they had called to discuss their potential participation in government. It was derailed over questions about its newly elected TD for Dublin Bay South, Eoin Hayes , and his shareholding in a former employer that had close ties to the Israel Defense Forces (IDF). A few hours later, Hayes was suspended from the parliamentary party. He remains in political purgatory, with no indication of whether or when he will be readmitted to the party – which itself seems uncertain about how to bring this unusual situation to an end. It was, by any measure, a catastrophically bad outing. Hayes, surrounded by party colleagues, stuck to his lines on the disposal of shares in the company Palantir but refused to answer questions on when he sold them or how much he had earned. The excruciating exchange went on for just over 22 minutes, focusing initially on whether Hayes had acted hypocritically in holding the shares and being a member of the Social Democrats, which called on the Government to divest its shareholding companies with IDF links. READ MORE It became truly problematic when Hayes said: 'Before I entered politics, I divested from those shares entirely.' This was not true. He sold them in July, having been elected as a councillor in June. Events unravelled rapidly for Hayes and the Social Democrats, who jointly divulged that he sold 7,000 shares for €199,000. He later said his statements were inaccurate but not intentionally so. Clearly this was a serious matter – hypocrisy is bad, but putting inaccurate information out, while being backed up by his colleagues, brought things to another level. He was suspended 'with immediate effect', with no time frame attached to the punishment – meaning he would sit as an Independent, with reduced access to speaking time, committee membership and parliamentary party meetings. Before the Dáil even sat, the Social Democrats were down a TD. A review was commissioned from the party's national executive, which took two months to decide to extend the suspension indefinitely. More than four months later, questions remain unanswered. These include for Hayes, who has maintained a near total public silence on the matter. What, for example, did he mean when he said he sold the shares before entering politics; was it national or local politics? If, in the moment, he meant his Dáil election, why did he allow the impression to form at the press conference that this related to his council election five months earlier? Has he sought to be readmitted to the party? How does he explain the disastrous outing? What happened afterwards? What does he think of his suspension, or the review? After six months the party doesn't seem to have a clear explanation for how it arrived here, or what's next As for the party, it has a code of conduct for members, within which there are sections covering openness and honesty in public, and earning and maintaining the trust and confidence of the public. Regarding the sanction, a spokeswoman said there were 'internal disciplinary processes which can lead to a variety of different sanctions', but declined to share its disciplinary procedures, so we don't know if they envisage an indefinite suspension. The party's constitution allows the leader to suspend the whip until the matter is investigated, for a specified period of time or until a specified event has occurred or an action has been taken. While a review has happened, the party did not specifically address whether it was waiting for an event or action to take place. Obviously no specified period of time has been imposed. We don't know if the Social Democrats review identified any further information relevant to the matter; a spokeswoman for the party said he was suspended in line with the party's constitution for providing incorrect information to the media about the timing of the share sale. 'The Social Democrats national executive subsequently endorsed that decision. That remains the case, the reason for the suspension has not changed and there is no further update.' There have been reports of a split within the party over whether to readmit Hayes. If that is the case, are internal party dynamics preventing the issue from being brought to a close? If so, is that sustainable – can a suspension that is imposed for one thing (the plinth incident) continue because the party is unable to agree on the best way forward? It is possible, of course, that some within the party membership object not just to the plinth incident but to the holding and disposal of shares at all – but this is not what he was suspended for. Also, there is the question of whether it's in keeping with natural justice to impose a sanction without end. There have been examples of suspensions before that had no time frame attached when handed down – after Golfgate, for example. But those politicians were back in the party after six months. Mattie McGrath lost the Fianna Fáil whip in 2010 and left the party about seven months later. More recent suspensions, for example for Green Party TDs who voted against the last government, were explicitly time bound when they were imposed. Meanwhile, the party has continued to act as though Hayes is one of their TDs for the purposes of committee chair allocations. Public funds are allocated on the basis of TDs elected for a party – with Hayes potentially meaning another €56,574 to party coffers if he is counted as one of their TDs. A party spokeswoman did not directly address whether it would claim this – saying like all parties it is in receipt of State money allocated on the basis of electoral performance. After six months the party doesn't seem to have a clear explanation for how it arrived here, or what's next. Exactly the sort of thing the Opposition tends to excoriate Government over.
