Featured Product

    BIS Paper on Impact of Non-Bank Intermediation on Financial Stability

    November 01, 2021

    The Bank of International Settlements (BIS) published a paper that discusses the financial stability implications of the developments in the non-bank financial intermediation sector. The paper lays out a framework for the key channels of systemic risk propagation in the presence of non-bank financial intermediaries, emphasizing the central role of leverage fluctuations through changes in margins. In the framework, deleveraging and "dash for cash" scenarios (as during COVID-19) emerge as two sides of the same coin, rather than being two distinct channels of stress propagation. These findings have implications for the design of non-bank financial intermediary regulations and of central bank backstops.

    The paper begins by offering a high-level overview of the increasing footprint of non-bank financial intermediaries in the financial system and looks at selected factors behind their growth. Next, it 2 highlights that systemic risk in non-bank financial intermediary activities often stems from their liability structure—chiefly the use of leverage together with their role in liquidity/maturity transformation. It also describes the mapping between non-bank financial intermediary activities and sources of systemic risk, focusing in particular on those intermediaries that can give rise to substantial liquidity demand during times of market turmoil. Then, it lays out the conceptual framework that formalizes the key channels of systemic risk propagation in market-based intermediation involving non-bank financial intermediaries and uses examples from March 2020 to showcase the key elements of the framework empirically, before finally summarizing key policy and implications and conclusions.

    The paper notes that the greater footprint of non-bank financial intermediaries raises the importance of regulations. A key implication of taking a broad-based perspective is that containing solvency risk and addressing investor protection is not sufficient by itself to contain systemic risk. A pure solvency-based perspective is of limited use, since it ignores the externalities and feedback effects that underpin system risk. This calls for a macro-prudential approach toward non-bank financial intermediation regulation. In the new market intermediation ecosystem, margin requirements take on a pivotal role for the propagation of financial conditions through fluctuations in leverage. The paper also finds that the prominent role of the non-bank financial intermediaries has brought benefits by diversifying funding sources, but it has also exacerbated some liquidity imbalances that can, in extreme cases, endanger financial stability. The framework presented in this paper implies that sharp increases in margins, especially after a protracted period of thin margins, will tighten financial conditions for the system as a whole. It also points to a tight link between deleveraging and "dash for cash," as during the COVID-19 pandemic. The systemic relevance of non-bank financial intermediaries raises questions about the appropriate policy strategies. In particular, there is an important correspondence between access to public resources and oversight.

     

    Related Links

    Keywords: International, Banking, NBFI, Liquidity Risk, Systemic Risk, Financial Stability, BIS

    Featured Experts
    Related Articles
    News

    EBA Publishes Final Regulatory Standards on STS Securitizations

    The European Banking Authority (EBA) published the final draft regulatory technical standards specifying and, where relevant, calibrating the minimum performance-related triggers for simple.

    September 20, 2022 WebPage Regulatory News
    News

    ECB Further Reviews Costs and Benefits Associated with IReF

    The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.

    September 15, 2022 WebPage Regulatory News
    News

    EBA Publishes Funding Plans Report, Receives EMAS Certification

    The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).

    September 15, 2022 WebPage Regulatory News
    News

    MAS Launches SaaS Solution to Simplify Listed Entity ESG Disclosures

    The Monetary Authority of Singapore (MAS) set out the Financial Services Industry Transformation Map 2025 and, in collaboration with the SGX Group, launched ESGenome.

    September 15, 2022 WebPage Regulatory News
    News

    BCBS to Finalize Crypto Rules by End-2022; US to Propose Basel 3 Rules

    The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.

    September 15, 2022 WebPage Regulatory News
    News

    IOSCO Welcomes Work on Sustainability-Related Corporate Reporting

    The International Organization of Securities Commissions (IOSCO) welcomed the work of the international audit and assurance standard setters—the International Auditing and Assurance Standards Board (IAASB)

    September 15, 2022 WebPage Regulatory News
    News

    BoE Allows One-Day Delay in Statistical Data Submissions by Banks

    The Bank of England (BoE) published a Statistical Notice (2022/18), which informs that due to the Bank Holiday granted for Her Majesty Queen Elizabeth II’s State Funeral on Monday September 19, 2022.

    September 14, 2022 WebPage Regulatory News
    News

    ACPR Amends Reporting Module Timelines Under EBA Framework 3.2

    The French Prudential Control and Resolution Authority (ACPR) announced that the European Banking Authority (EBA) has updated its filing rules and the implementation dates for certain modules of the EBA reporting framework 3.2.

    September 14, 2022 WebPage Regulatory News
    News

    ECB Paper Discusses Disclosure of Climate Risks by Credit Agencies

    The European Central Bank (ECB) published a paper that examines how credit rating agencies accepted by the Eurosystem, as part of the Eurosystem Credit Assessment Framework (ECAF)

    September 13, 2022 WebPage Regulatory News
    News

    APRA to Modernize Prudential Architecture, Reduces Liquidity Facility

    The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility (CLF) for authorized deposit-taking entities to ~USD 33 billion on September 01, 2022.

    September 12, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8514