Neither Silicon Valley Bank (SVB) nor Credit Suisse. The main current risk for the financial system are high-risk funds, known as ‘hedge funds’, which operate outside of banking regulations and which in recent years have acquired a weight in debt operations similar to that of banks supervised, assured today the vice-president of the ECB, Luis de Guindos.
“That is where the main source of financial instability is, even after what happened with SVB and Credit Suisse,” Guindos said this morning in Madrid, at a meeting organized by the “la Caixa” Foundation Chair in Economy and Society.
What is a hedge fund? Also called hedge funds, these firms carry out operations that are not allowed for traditional funds, from bets on the stock market to those related to financial derivatives or the purchase of companies through heavy indebtedness. They are the most aggressive version of what is known as “shadow banking”, whose margin of action is very wide and escapes the supervisors’ radar.
“The main difficulties are in the non-banking sector, in high-risk funds, the ‘hedge funds,'” Guindos indicated, before explaining that the International Financial Stability Board (FSB, for its acronym in English) has already He has proposed “a kind of prudential framework with regulations in this regard.”
“Leverage has become very sophisticated. It now takes place mainly in the derivatives market, and it is a hidden leverage that is difficult to follow,” said the vice president of the ECB. The problem is that with interest rate rises these types of funds may have difficulties.
In the euro zone, he pointed out, in recent years there has been a transition from an economy “very heavily banked, with a weight of 70% of the banks compared to 30%, to another in which the banks have 55% and the rest , 45%”. High-risk funds have gained weight, especially “in segments such as real estate and commercial,” and have a “great relationship with banks,” which in some cases finance the operations of these firms.
Guindos has offered this notice in a presentation dedicated to monetary policy and the situation of the economy. The ECB’s obsession, he insists, is to lower inflation to the 2% target, for which attention is now focused on monitoring core inflation, that is, inflation that does not include energy or fresh food.
“The inflation narrative has changed,” he said. There has been a shift from price rises caused by energy and supply problems to another type of “stickier” inflation, which is underlying inflation, which is affected by other elements, including better behavior of demand.
Guindos is concerned about wage increases and fiscal support measures, as both elements push prices up. “In the case of salaries, we are now seeing an acceleration because, unlike business margins, which look to the future, the revision of salaries comes from behind,” he pointed out.
The effect of interest rate increases is not usually appreciated in its full intensity until a few months have passed, so the ECB remains expectant. It does take for granted a tightening of financing conditions and also greater uncertainty after the Credit Suisse crisis. “I think the recent bouts of financial instability will mean a further tightening of financing conditions,” he said.
Regarding fiscal policy, his message is the same that he has been repeating since the turmoil in the United Kingdom that cost British Prime Minister Liz Truss his job due to his indiscriminate tax cuts accompanied by an increase in public spending: “fiscal policy must be aligned with monetary policy because otherwise the effect could be counterproductive for the markets”.
