Non-bank financial intermediaries and financial stability

Sirio Aramonte, Andreas Schrimpf and Hyun Song Shin

No 972, BIS Working Papers from Bank for International Settlements

Abstract: The heft of non-bank financial intermediaries (NBFIs) in the financial system has grown significantly after the Great Financial Crisis of 2008. This paper reviews structural shifts in intermediation and how NBFIs have shaped the demand and supply of liquidity in financial markets. We then lay out a framework for the key channels of systemic-risk propagation in the presence of NBFIs, emphasising the central role of leverage fluctuations through changes in margins. The debt capacity of an investor is increasing in the debt capacity of other investors in the system, so that leverage enables greater leverage, and spikes in margins can lead to system-wide deleveraging. In our framework, deleveraging and `dash for cash' scenarios (as during the Covid-19 crisis) 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 NBFI regulations and of central bank backstops.

Keywords: financial intermediation; non-banks; market-based finance; market liquidity; systemic risk (search for similar items in EconPapers)
JEL-codes: G22 G23 G28 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2021-10
New Economics Papers: this item is included in nep-cba and nep-cwa
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Related works:
Chapter: Non-bank financial intermediaries and financial stability (2023)
Working Paper: Non-bank Financial Intermediaries and Financial Stability (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:972

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