Non-banking financial markets need consolidation, from macroprudential perspective

The composite indicator of systemic stress (CISS) remains, at the beginning of the first quarter of 2021, at a low level, both in Romania, as well as in the European Union, indicating a stable investment climate, shows the most recent Report for trends and risks in financial markets, elaborated by the Authority for Financial Oversight (ASF), agerpres reports.

According to a release of the Authority, the indicator shows that there are no macroeconomic tensions, but, in the context of the spread of new strains of COVID-19 and the delay in implementing the vaccination process, its value may record a slight increase, being affected by the volatility of financial assets it measures.

According to OCDE prognoses, the growth of the European economy will be done gradually, in 2021, as the decisions regarding the limiting of the SARS-CoV-2 virus' spread will take effect.

At the same time, the Report regarding financial stability, published recently by the ECB, indicates the fact that many investment funds, insurance companies and pension funds in the Eurozone are not exposed to an increase of bond yields or a correction on credit markets.

ASF mentions that investment funds recalibrated their portfolios, through the transfer of investments from bonds to shares, in the context of yields increasing. Nonetheless, the process of orienting towards profits in the past years determined non-banking financial institutions to increase their duration risk related to the bonds portfolio. This increases the sensibility of their assets to higher interest rates, though for insurance companies and pension funds, the losses from re-evaluating assets may be compensated through a diminishment of the value of debts, given the negative duration gap of the two sectors.

Non-banking financial institutions also need high exposures to companies with weak foundations, more than a quarter of their bond holdings having negative credit rating. Nearly half of them have also a BBB rating, slightly above the status of increased yield. At the same time, starting November 2020, investment funds reduced their liquidity reserves, the cash reserves and holdings of liquid assets being at the pre-pandemic levels, creating vulnerabilities in the case of high volumes of buybacks.

According to the ASF, the liquidity risk of investment funds rose in recent years due to the orientation towards high profits. This emphasizes the importance of consolidating the non-banking financial sector, from a macroprudential perspective as well.