The Financial Times published an article titled, "EU plans sweeping stress test of non-banks," which tells us, "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." (Note: We recently changed the dates for our next European Money Fund Symposium; it is now scheduled for Sept. 22-23, 2025, in Dublin, Ireland. We also hope to see many of you next month at our big show, Money Fund Symposium, which is June 23-25 in Boston.)
The piece continues, "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."
It explains, "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.'"
The FT says, "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."
They state, "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 FT adds, "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."
In other international money fund news, Yicai Global posted, "Chinese Savers Flip to Gold, Bonds, and Money Market Funds as Deposit Rates Fall Below 1%." The brief states, "Chinese savers are increasingly shifting their money into bank stocks, gold, bond funds, and money market funds after major banks cut their one-year deposit rates to below 1 percent -- an unprecedented low. Last week, state-owned lenders including Industrial and Commercial Bank of China and Agricultural Bank of China slashed their deposit rates below the psychologically significant 1 percent level, prompting a wave of portfolio rebalancing among retail investors. The long-term trend shift is reflected in recent data from the People's Bank of China: household deposits dropped by CNY1.39 trillion (USD193 billion) in April, while deposits held by non-bank and other financial institutions surged by CNY1.57 trillion."
It continues, "For risk-averse investors, bond and money market funds have emerged as attractive alternatives. One retail investor told Yicai that he now allocates 60 percent of his income to bond funds, which returned 5 percent last year -- well above fixed deposit rates. With rates continuing to fall, he plans to invest the remaining 40 percent into bond funds as well."
Finally, Yicai writes, "Another investor in Shenzhen said he began investing in gold exchange-traded funds in 2022, alongside his allocations to bond and money market funds.... Young Chinese adults are showing interest in diversification. As of April, 9.4 million Alipay account holders born after 1990 simultaneously held money market funds, bond funds, and gold ETFs, according to Ant Fortune, an online wealth management platform under Ant Group."
