Expanding operations of so-called « shadow » banks may bring a liquidity crisis, the European Central Bank warned. As a result, current EU regulations may not resist fresh economic shocks adequately, reports The Financial Times.

Hedge funds, pension funds, and insurance funds may be considered « shadow » banks, according to ECB Vice President Luis de Guindos. Since there have been many more of these organizations during the past 10 years and regulation is still fairly lax, he claimed that the activities of these organizations pose a significant risk to the world economy.

Interaction between the banking and non-banking sectors is insufficient, noted de Guindos. As a result, if interest rates increase and asset prices decline, the non-banking sector is much more at danger.

His remarks suggest that the ECB is extremely concerned about the condition of « shadow » banks in light of the recent banking crises in the US and Switzerland. De Guindos advised these institutions to boost their liquid assets to prepare for a potential withdrawal of investor cash.

source: ft.com