PARIS: Banks in the European Union may expand their hedge fund exposure as the industry expands, according to the European Central Bank (ECB). It said in a report that risk management is generally strict in the banking sector, but there is scope for improvements in counterparty discipline, mostly under pressure due to competitive market conditions.
The central bank's study indicated that most stress tests applied by banks included historical scenarios which often applied to individual hedge funds and stress testing of collateral was less common.
The study revealed inadequate information flow from hedge funds to banks, while firm-wide aggregation of multiple exposures to individual or groups of hedge funds using similar strategies was found to be problematic.
Though EU politicians have been demanding more regulation on hedge fund operations to bring in transparency, the ECB said introduction of new rules in the sector would need the cooperation of the U.S. government as many of the hedge funds are located in that country.
The ECB, while not directly supervising banking operations in the EU, monitor financial risks in the region.
A survey by the Banking Supervision Committee (BSC) of the European System of Central Banks (ESCB) revealed that exposures of large EU banks to hedge funds varied across countries and generally were not large in relation to either the banks' balance sheets or total income.
Meanwhile, there are indications that Eurozone interest rates are expected to rise next week -- for the first time in more than five years. Economists expect the ECB to raise its main refinancing rate by 25 basis points to 2.25 per cent at Thursday's governing council meeting. Analysts are of the opinion that the ECB may raise the rates by 100 basis points to 3 per cent by the end of next year.
However, ECB president Jean Claude Trichet has made it clear that any change should not be seen as the beginning of a series of rate rises. There is, therefore, uncertainty over further rate hikes.
Posted
on : Mon, 28 Nov 2005 20:20 GMT | Banking News
By : Paula Jenkins
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