FRANKFURT, Dec 20 (Reuters) - The European Union’s financial-risk regulator said on Wednesday stricter rules are needed to limit how much risk investment funds can take on, because their growing size and importance could exacerbate any new financial crisis.
Investment funds in the EU have grown to equal the banking sector in size and grabbed some of the business banks could no longer afford to take in the aftermath of the financial crisis.
The European Systemic Risk Board, chaired by Mario Draghi - the head of the European Central Bank - said on Wednesday it had adopted a “recommendation” that would be published early next year and address the leverage and liquidity of investment funds.
“There are concerns that the greater role of investment funds in financial intermediation may result in them amplifying any future financial crisis,” the ESRB said.
“Therefore, the General Board adopted a Recommendation which addresses systemic risks related to liquidity mismatches and the use of leverage in investment funds.”
The ESRB’s recommendation are not mandatory but is intended to spur EU and national lawmakers into action.
The watchdog also said it would publish “in due course” a feasibility study on so-called sovereign bond-backed securities, effectively derivatives backed by a diversified portfolio of EU sovereign debt. (Reporting By Francesco Canepa, editing by Larry King)