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 Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models

    The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.

    June 21, 2022 WebPage Regulatory News
    News

    EP Reaches Agreement on Corporate Sustainability Reporting Directive

    The European Council and the European Parliament (EP) reached a provisional political agreement on the Corporate Sustainability Reporting Directive (CSRD).

    June 21, 2022 WebPage Regulatory News
    News

    PRA Consults on Model Risk Management Principles for Banks

    The Prudential Regulation Authority (PRA) launched a consultation (CP6/22) that sets out proposal for a new Supervisory Statement on expectations for management of model risk by banks.

    June 21, 2022 WebPage Regulatory News
    News

    EC Regulation Amends Standards for Calculating Credit Risk Adjustments

    The European Commission (EC) published the Delegated Regulation 2022/954, which amends regulatory technical standards on specification of the calculation of specific and general credit risk adjustments.

    June 21, 2022 WebPage Regulatory News
    News

    BIS Hub Updates Work Program for 2022, Announces New Projects

    The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.

    June 17, 2022 WebPage Regulatory News
    News

    EIOPA Issues Cyber Underwriting Proposal, Statement on Open Insurance

    The European Insurance and Occupational Pensions Authority (EIOPA) published two consultation papers—one on the supervisory statement on exclusions related to systemic events and the other on the supervisory statement on the management of non-affirmative cyber exposures.

    June 17, 2022 WebPage Regulatory News
    News

    US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule

    Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)

    June 16, 2022 WebPage Regulatory News
    News

    EIOPA Consults on Review of Securitization Framework in Solvency II

    The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.

    June 16, 2022 WebPage Regulatory News
    News

    UK Authorities Issue Regulatory and Reporting Updates for Banks

    The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.

    June 15, 2022 WebPage Regulatory News
    News

    BCBS Issues Climate Risk Principles while HKMA Expresses Its Support

    The Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks.

    June 15, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8286