The EU plans to stress test "non-bank institutions": hedge & pension funds, the insurance industry may become financial landmines, can Blockchain help?

According to the Financial Times, EU regulators plan to conduct stress tests on non-bank financial institutions for the first time, with the aim of identifying possible financial vulnerabilities. (Synopsis: Unleash $2 trillion!) The United States intends to reduce the bank's "supplementary leverage ratio SLR" to relax restrictions since the 08 financial crisis) (Background supplement: Japanese bonds pull alarm! Ten-year interest rates hit a 25-year high, life insurance giants lost 3.6 trillion yuan, and the script of the collapse of Silicon Valley banks reappeared) According to the Financial Times, EU regulators plan to conduct stress tests on non-bank financial institutions for the first time, with the aim of identifying possible financial vulnerabilities. The measure reflects regulators' concerns about the risks posed by the rapid expansion of lesser-regulated non-banks such as hedge funds and private equity firms. Since such institutions may experience severe market fluctuations that may have a systemic impact on the overall financial system, the EU hopes to strengthen the grasp of the non-bank financial sector through testing to further prevent the potential crisis from spreading to the wider financial market. Stress Test Spotlight: Challenges and Concerns for Non-Bank Financial Institutions Non-bank financial institutions have played a key role in many market turmoil events in recent years. For example: In the early days of the pandemic in 2020, these institutions sold assets in order to liquidate, resulting in a liquidity crunch in the bond market In 2021, family office Archegos Capital Management went bankrupt due to highly leveraged operations, causing heavy losses for many banks After Russia's invasion of Ukraine in 2022, energy traders also fell into liquidity difficulties due to sharp price fluctuations These cases clearly show that the vulnerability of non-banks under stress cannot be ignored. At the same time, since the 2008 global financial crisis, the lending structure of financial markets has also changed significantly. Lending activities, which used to be dominated by traditional banks, are increasingly being undertaken by non-banks. These institutions, while not as heavily regulated as banks, operate in a similar way to banks. According to the ECB, by the end of 2023, nearly a quarter of the total lending of €19 trillion in the eurozone as a whole came from non-bank financial institutions; Among them, the proportion of loans from insurance companies and pension funds continues to rise. Such a trend has alarmed regulators, as non-banks generally lack transparency and are highly connected to traditional banks, and if something goes wrong, it could trigger a chain reaction that threatens the stability of the entire financial system. In this regard, Claudia Buch, Chairman of the ECB Supervisory Committee, stressed at a hearing in the European Parliament: We have seen many times that liquidity risks from non-bank financial intermediaries spill over to other financial sectors. Therefore, it is crucial to have a better understanding of this area and strengthen supervision. The stress test will cover major non-banks such as hedge funds, private equity firms, insurers and pension funds, and will examine their ability to withstand stress and the possible impact on the overall financial system by simulating market crisis scenarios. However, the specifics of the test are still being worked out, and some officials expect the stress test to start as soon as next year. Cryptocurrencies and blockchain technology: a potential tool to mitigate risks? It is worth noting that in view of the systemic risks posed by the non-bank financial system, more and more people are paying attention to the role that blockchain and cryptocurrency technology may play. Analysts believe that due to the decentralized and highly transparent nature of blockchain, it may be able to help improve the traceability and efficiency of financial transactions in the future. For example, distributed ledger technology (DLT) can record all transactions in real time, reducing the potential risk caused by information asymmetry for non-banks. In addition, the combination of blockchain and smart contracts can further automate risk management processes, such as setting liquidity thresholds in loan contracts to reduce the probability of default by non-banks in the face of market pressures. If such technologies can be developed through proper regulation, crypto assets may have a real opportunity to become an important tool to complement the risk management shortcomings of the traditional financial system in the future. Related reports FSC: Virtual asset exchanges ban "cash transactions"! 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