In a recent statement, John Berrigan, a senior official of the European Union, has called for a more nuanced approach to the regulation of non-banking financial intermediaries. Berrigan, who serves as the director-general for financial stability, financial services, and capital markets union at the European Commission, expressed this sentiment during a meeting on October 15. He argued that while it is unrealistic to expect regulators to completely eliminate risks in the non-bank sector, it is crucial to understand these entities’ relationships with the banking system.
Understanding Financial Intermediation by Non-Banks
Financial intermediation by non-banks refers to the process where non-banking institutions serve as intermediaries between borrowers and savers, just like banks. These institutions can include insurance companies, mutual funds, and pension funds, among others. They play a vital role in the economy by channeling funds from those with surplus capital to those in need of capital.
The Need for Adequate Regulation, Not Over-Regulation
Given their role and influence in the financial markets, non-banking financial intermediaries can pose certain risks. However, Berrigan believes that heavy regulation of these entities isn’t necessarily the solution. Instead, he suggests a focus on investigating their ties to the banking system. This approach, he believes, would be more effective in managing the potential risks associated with non-banking financial intermediaries.
“Risk is like the law of thermodynamics – you cannot destroy it,” Berrigan said.
This statement suggests that while regulators can’t eliminate risk, they can manage it effectively to ensure the stability of the financial system. This approach requires an understanding of the interconnectedness of different financial entities, not just the imposition of strict regulations.
Implications for Policy-Makers
Berrigan’s views indicate a need for policy-makers to adopt a more informed and balanced approach when dealing with non-banking financial intermediaries. Instead of imposing heavy regulations, the emphasis should be on understanding the nature of the risks and managing them strategically.
This perspective has significant implications for the way regulators approach the financial sector. It calls for a shift from a one-size-fits-all regulatory approach to a more nuanced strategy that takes into account the unique roles and risks associated with different financial intermediaries.
In conclusion, while acknowledging the presence of risk in the financial sector, it is important for regulators to understand the relationships between different entities in the sector. This understanding, according to Berrigan, would lead to a more effective risk management strategy that enhances financial stability without stifling economic growth.
For more on this, click Here.
