Bank-NBFI interconnections create systemic risks, report finds
A joint report by the European Central Bank (ECB) and the European Systemic Risk Board (ESRB) identifies significant financial stability risks from interconnections between banks and the non-bank financial intermediation (NBFI) sector. These vulnerabilities are concentrated in large euro area global systemically important banks (G-SIBs).
Concentrated vulnerabilities in G-SIBs
The joint report by the ECB and ESRB finds significant interconnections between banks and the non-bank financial intermediation (NBFI) sector, creating important vulnerabilities that could amplify stress.
These risks are highly concentrated in a small number of large euro area global systemically important banks (G-SIBs).
Banks interact with NBFIs through liquidity management, provision of leverage, and market-making.
Systemic risks can materialise via two main channels.
First, a loss of short-term funding from NBFI entities could create challenges for banks in periods of market tension, owing to funding homogeneity and limited substitution.
Second, lending to leveraged NBFI entities, such as hedge funds and securities firms, exposes banks to outcomes of NBFI trading strategies.
This increases vulnerability to asset price shocks, potentially leading to unwinding of positions and asset fire sales.
Data gaps hinder risk assessment
The report provides novel insights based on granular transaction and exposure-level data, which are key to understanding bank-NBFI linkages.
However, the analysis is constrained by significant data gaps and fragmented data access.
Notably, data on exposures and transactions taking place outside the EU are largely missing, reducing the visibility of risks to the EU financial sector.
Improved information sharing, including a centralised mechanism for data access and sharing, could remedy some of these constraints and enhance the assessment of financial stability risks.