The Bank of England (BoE) is striving to bring in a series of new measures to further mitigate risk within the shadow banking sector, and considering how it can create tighter liquidity requirements for sterling during times of crisis. Since shadow banks involve short term funding sources, if there is a rapid sell off, shadow banks may not be able to finance all the investors at the current liquidity levels.
Shadow banks are financial intermediaries such as money market funds, investment banks, and mortgage lenders. They deviate from traditional banking in that they operate with significantly less regulatory oversight. This difference in regulatory oversight has given rise to concerns, particularly following the pronounced selloff of UK gilts in 2022, which posed a serious danger to the stability of the UK’s financial markets. Specifically, the focus was on pension funds, as they encompass a number of gilts. Alongside this, a sudden rise in interest rate expectations fuelled the chaos of the mortgage markets, causing further fears in the shadow banking sector.
Consequently, financial stability experts at the BoE have advocated tighter requirements, as they allude to the escalating vulnerabilities arising in the sector, stemming from geopolitical tensions, and stretched valuations. Presently, money market funds are obligated to maintain a minimum of 30% of their assets in a form that can be readily converted into cash within a seven-day timeframe. However, the US Securities and Exchange Commission (SEC) has increased its requirements to 50%. In response, the Financial Conduct Authority (FCA) and HM Treasury plan to meet shortly to agree an appropriate course of action in line with international procedures. This expansion of liquidity regulations is expected to help mitigate credit risks in the future.
Since the world leading semiconductor manufacturer, Taiwan Semiconductor Manufacturing Co (TSMC), has remodelled its supply chains, four of its suppliers have publicly expressed interest in establishing a presence in the European Market. Relocating manufacturers to the European chemical market could increase competition and enhance production efficiency.
Vincent Liu, CEO of LCY Group, a supplier to TSMC, has long been concerned about the inefficiency and reliance on outdated technology in European chemical manufacturers providing essential materials for semiconductor production. Further exacerbated by the competitive threat and risk of the industrial base migrating to the United States, the European semiconductor industry needs to adapt to the evolving world, if it is to remain competitive in the market.
In response to these challenges, the European Union, alongside Japan and South Korea, has undertaken proactive measures. Under the European Chips Act, they have introduced subsidies worth €43bn, which are specifically tailored to bolster the technology and clean energy sectors in their countries and put them back in the competitive market.
Nevertheless, these developments have given rise to valid concerns articulated by industry experts. Of particular significance is the worry that Europe may currently lack the robust supply chains necessary to accommodate the substantial increase in semiconductor production capacity. This sentiment is echoed by TSMC's Chief Executive, Mark Liu, who has acknowledged that it is a large concern of his. The resilience and adaptability of Europe's supply chain ecosystem is recognised as being critical in Europe’s endeavours to retain its position in the highly competitive and rapidly evolving semiconductor market.
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