The European Banking Authority has advised lenders who manage ETFs to build up their capital reserves to guard against the risk of a potential rush for the exits in the financial products, according to a report.
“The EBA’s warning comes after a number of other industry bodies have expressed concerns about the potential risks posed by ETFs,” according to a report from Ignites Europe.
“Credit institutions should ensure they have a comprehensive understanding of the liquidity risk if the ETF business were to face a sudden, unexpectedly large withdrawal. This is especially relevant for banking groups which include an undertaking which offers ETFs. Liquidity risk associated with sudden withdrawals should be transparent, regularly monitored and communicated to both the treasury and risk management functions,” the EBA said in an opinion paper.
The regulator notes the use of ETFs has grown significantly in Europe in recent years, and that banks are major participants in the business since they act as fund managers, counterparties, market makers and investors.
“ETFs may not be able to service large redemptions in case of a run, especially if the underlying asset markets become illiquid, pressuring the credit institution to step in and support the ETF due to reputational risk,” the EBA said.
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