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

Blake Coules
Across 35 years in banking, Blake has gained deep insights into the inner working of this sector. Over the last two decades, Blake has been an Operating Committee member, leading teams and executing strategies in Credit and Enterprise Risk as well as Line of Business. His focus over this time has been primarily Commercial/Corporate with particular emphasis on CRE. Blake has spent most of his career with large and mid-size banks. Blake joined Moody’s Analytics in 2021 after leading the transformation of the credit approval and reporting process at a $25 billion bank.

Karen Moss
Senior practitioner in asset and liability management (ALM) and liquidity risk who assists banking clients in advancing their treasury and balance sheet management objectives
Related Articles
EBA Launches Stress Tests for Banks, Issues Other Updates
The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021.
EBA Proposes Standards for IRRBB Reporting Under Basel Framework
The European Banking Authority (EBA) proposed implementing technical standards on the interest rate risk in the banking book (IRRBB) reporting requirements, with the comment period ending on May 02, 2023.
FED Issues Further Details on Pilot Climate Scenario Analysis Exercise
The U.S. Federal Reserve Board (FED) set out details of the pilot climate scenario analysis exercise to be conducted among the six largest U.S. bank holding companies.
US Agencies Issue Several Regulatory and Reporting Updates
The Board of Governors of the Federal Reserve System (FED) adopted the final rule on Adjustable Interest Rate (LIBOR) Act.
ECB Issues Multiple Reports and Regulatory Updates for Banks
The European Central Bank (ECB) published an updated list of supervised entities, a report on the supervision of less significant institutions (LSIs), a statement on macro-prudential policy.
HKMA Keeps List of D-SIBs Unchanged, Makes Other Announcements
The Hong Kong Monetary Authority (HKMA) published a circular on the prudential treatment of crypto-asset exposures, an update on the status of transition to new interest rate benchmarks.
EU Issues FAQs on Taxonomy Regulation, Rules Under CRD, FICOD and SFDR
The European Commission (EC) adopted the standards addressing supervisory reporting of risk concentrations and intra-group transactions, benchmarking of internal approaches, and authorization of credit institutions.
CBIRC Revises Measures on Corporate Governance Supervision
The China Banking and Insurance Regulatory Commission (CBIRC) issued rules to manage the risk of off-balance sheet business of commercial banks and rules on corporate governance of financial institutions.
HKMA Publications Address Sustainability Issues in Financial Sector
The Hong Kong Monetary Authority (HKMA) made announcements to address sustainability issues in the financial sector.
EBA Updates Address Basel and NPL Requirements for Banks
The European Banking Authority (EBA) published regulatory standards on identification of a group of connected clients (GCC) as well as updated the lists of identified financial conglomerates.