EU Regulators Warned of Financial Crises

EU finance ministries issued a report last week that warns European Union regulators aren't prepared for financial crises at a time when hedge funds and private buyout firms pose rising risks to the economy.  The report was issued on April 4 by senior officials of finance ministries and central banks in a group called the Economic and Financial Committee.

“Progress has been insufficient since 2004 in most of the member states,'' said the report.  The EU asks finance ministers to endorse calls for greater cooperation and preparation at a meeting next month.   Regulators and central bankers are sharpening vigilance against potential disruptions to financial systems from greater borrowing, trading and use of derivatives by hedge funds.

Goldman Sachs analysts said on March 23 that investors around the world plan to put 28 percent more money into hedge funds this year.   “Hedge funds can contribute to market efficiency and sharing of risks, but can also be a source of systemic risks,'' the EU report said. Regulators should “continue monitoring possible threats to ensure market integrity, investor protection and proper functioning of markets and financial stability.''

Private buyout firms pose another concern due to illiquidity and lack of transparency, according to the report.  “The relative growth in private equity markets compared to the public market may increase risks to financial stability.''   Banking supervisors have to step up monitoring of lending to hedge funds and regulators should conduct stress tests to ensure that any transaction failures or fund collapses wouldn't cascade through markets, according to the report.