Europe’s financial watchdogs are setting their sights on non-bank financial institutions (NBFIs), a sector that has grown increasingly prominent as an alternative to traditional banks in providing credit.
However, the umbrella organisations representing insurers and asset managers—Insurance Europe and Efama—are pushing back, arguing that the proposed regulations are unnecessary and risk stifling a diverse and complementary part of the financial system.
The rise of NBFIs
NBFIs encompass a wide range of entities, including insurers, asset managers, pension funds, family offices, and private equity firms. These institutions operate outside the banking framework and therefore avoid the strict regulations imposed on banks, despite engaging in similar financial activities.
In Luxembourg, that development has become visible through the increasing popularity of private credit funds, which fill a void that banks have left as a result of tighter banking regulation.
Critics of the current regulatory landscape, including Francesco Mazzaferro, head of the European Systemic Risk Board (ESRB) secretariat, warn that this creates systemic vulnerabilities.
“The importance of NBFIs will only increase as the EU continues to develop its capital markets union,” Mazzaferro noted at a conference in Brussels. “While they have the potential to complement banks and enhance financial stability, their interconnectedness and lower transparency pose macroprudential risks.”
Mazzaferro called for tighter liquidity requirements and increased transparency across the sector, particularly in asset management. Money market funds (MMFs) were singled out for reform, with the ESRB advocating for measures to make these vehicles more resilient in times of market stress.
Industry pushback
The proposed changes have sparked significant resistance from industry representatives. Thea Utoft Høj Jensen, CEO of Insurance Europe, criticised the broad classification of NBFIs, arguing that the term fails to capture the unique characteristics of different sectors. “The sectors being targeted each have their individuality and should also be approached that way by regulators,” she said.
Insurance Europe contends that existing regulations, such as Solvency II, are already sufficiently stringent, particularly in managing liquidity risks. Similarly, Efama’s regulatory director Federico Cupelli argued that asset managers play a complementary role to banks and that systemic risks are already adequately addressed under current rules.
Instead of imposing blanket regulations, Cupelli suggested adopting a more targeted approach, like the UK’s system-wide exploratory scenario (SWES), which focuses on critical NBFIs through collaborative engagement with the industry.
Pension funds under strain
Matti Leppälä, CEO of PensionsEurope, echoed these concerns, highlighting the regulatory burden already faced by pension funds. “We have to write reports that nobody reads,” he said, adding that an EU-wide harmonisation of pension regulations would be counterproductive. “National rules work well for our sector.”
A shifting regulatory climate
Complicating the debate is the deregulatory momentum in the US, spurred by the Trump administration. New Federal Deposit Insurance Corporation (FDIC) chairman Travis Hill has prioritised rolling back financial regulations, raising concerns among European financial institutions about competitiveness.
“European firms are facing high compliance costs that put them at a disadvantage,” Cupelli noted. However, he also pointed to signs of a shift towards deregulation within Europe, citing recent relaxations of rules governing European long-term investment funds (Eltifs) as an example.
Jean-Paul Servais, chair of the International Organization of Securities Commissions (Iosco), struck a conciliatory tone, acknowledging the need to balance new rules with efforts to reduce the overall regulatory burden. “If new regulations are introduced, others should be removed to ensure the net reporting burden on financial players is reduced,” he said.
What’s next?
The European Commission has concluded a round of consultations on NBFIs and is expected to outline its policy stance in the coming months. All eyes are on Maria Luís Albuquerque, the newly appointed European Commissioner for Financial Services, as she weighs the competing demands of regulators and industry stakeholders.
With tensions running high and the spectre of US deregulation looming, the EU’s next steps could redefine the balance between innovation and stability in Europe’s financial markets.