The German Federal Financial Supervisory Authority ( BaFin ) has announced being alarmed by the increase in shadow banking. BaFin is the financial regulatory authority for Germany.

It is an independent federal institution with headquarters in Bonn and Frankfurt and falls under the supervision of the Federal Ministry of Finance. During the International Club of Frankfurt Business Journalists, the president of the Federal Financial Supervisory Authority, Mark Branson, stated that the shadow banking sector has grown massively now is the time to tackle some serious regulation. He demanded strong global regulation and tighter surveillance of gray areas in financial markets.

What are shadow banks? Shadow banks are players in the financial markets who perform bank-like functions but are not banks and are therefore not subject to the regulation of credit institutions. These include, for example, securitisation companies, hedge funds, money market funds, pension funds, and asset managers without a banking license. Stricter regulation of this sector has been an issue since the 2007/2008 financial crisis.

Since then, however, stricter rules have been passed for traditional banks. Increase in European shadow banking According to Spiegel, the search for higher yields in times of extremely low-interest rates has allowed the shadow banking sector to grow by more than 50% in Europe alone since 2019. According to the BaFin president, this development entails risks.

Because shadow banks are not as heavily regulated as traditional banks, they may take on greater risks that can lead to high losses and these dangers shouldn’t be underestimated, even if parts of this sector are regulated. The sector has grown extremely, and the risks have therefore increased accordingly. Concern over the crypto market As reported by Spiegel, the BaFin president is also concerned about developments in the crypto market.

After the collapse of the FTX crypto exchange, a trading platform for digital currencies such as Bitcoin and Ether, in November 2022, investors are worried. According to the BaFin president, possibly the collapse of this market came at the right time, and now it is essential to learn the lessons and not allow the shadow banking sector to be left unregulated in the hope that it dies out.   Lack of risk awareness In an interview with the European Central Bank, Mark Branson stated that since the 2008 financial crisis, stricter standards drive supervisory practice in the euro area and that this has been instrumental in strengthening the resilience of the financial system and restoring confidence in the system.

However, the BaFin president expressed still being concerned that several reforms are still not completed, such as the implementation of Basel III, the European deposit insurance scheme, and the discussion on the risk weighting of sovereign bonds on bank balance sheets. .