VIENNA (Reuters) – Hedge funds could offer a systemic risk for European Union financial stability and regulators should closely monitor the exposure of the bloc’s banking system to that risk, according to a report from an EU body.
The Economic and Financial Committee of deputy finance ministers and central bankers said hedge funds had become very important to EU financial stability, but that regulators were not always aware of the risks they created.
“Hedge funds can contribute to market efficiency and sharing of risks but can also be a source of systemic risks,” said the EFC’s confidential report, prepared for a meeting of EU finance ministers this weekend in Vienna.
“Action should be targeted to ensure efficient monitoring of hedge fund risks by banks… and the prudence… and transparency of regulated financial institutions’ involvement in hedge fund activities,” the report said.
The number of hedge funds has ballooned from a few dozen funds a generation ago to 8,000 or more now with more than $1 trillion (570 billion pounds) under management.
