ECB's Villeroy Sees Risks From Shadow Banking, Emerging Markets

(Bloomberg) -- Supervisors need to keep a close eye on shadow banking and emerging market debt a decade on from the fall of Lehman Brothers, Bank of France Governor Francois Villeroy de Galhau said in a radio interview on Saturday.

As banks have pulled out of riskier businesses since the financial crisis, specialized investors have stepped in to swell the European Union’s shadow-banking system to more than 42 trillion euros ($49 trillion) in assets at the end of 2017, or about 40 percent of the bloc’s financial system, according to the European Systemic Risk Board.

ECB's Villeroy Sees Risks From Shadow Banking, Emerging Markets

“One of the main risks we have to look at today is outside the banking system, it’s what we call shadow banking, which has been less regulated,” Villeroy told France Inter, echoing calls by European Central Bank chief Mario Draghi this week. “It’s the big investment funds, they are partly American. We have to strengthen things in this area because it’s been a bit forgotten as regulation has been strengthened.”

The ECB Governing Council member, who is seen by economists as a potential successor to Draghi in a year, also pointed to risks from emerging market debt, citing crises in Turkey and Argentina in recent weeks.

‘Extremely Vigilant’

Corporate and household debt was at 190 percent of worldwide gross domestic product in 2001, rising to 210 percent in 2007 as the financial crisis began. Since then it has continued rising to 240 percent, he said.

“Advanced economies have seen it reduce a bit, and it has risen a lot in emerging countries,” Villeroy said.

Asked if he saw a “risk of contagion,” the central bank governor said: “Today, we don’t see it. I think of China, where Chinese authorities have the means to act, but we have to be extremely vigilant: everywhere rising debt means rising risks.”

Villeroy added that one of the lessons learned from the financial crisis was the benefit of countries working together to find collective responses and warned against the opposite approach of every man for himself. This was symbolized by the protectionist “America First” policies of President Donald Trump, he said.

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