Rise of NBFIs and the Global Structural Change in the Transmission of Market Shocks

Yoshihiko Hogen, Yoshiyasu Koide and Yuji Shinozaki
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Yoshihiko Hogen: Bank of Japan
Yoshiyasu Koide: Bank of Japan
Yuji Shinozaki: Bank of Japan

No 22-E-14, Bank of Japan Working Paper Series from Bank of Japan

Abstract: The March 2020 market turmoil raised concerns over vulnerabilities associated with the increasing market interconnectedness with Non-Bank Financial Intermediaries (NBFIs), most notably investment funds, in the global financial system (GFS). Studies on the measurement of fire sale vulnerabilities in part those associated with NBFIs in a financial system are often conducted at the jurisdiction level using fire-sale (FS) models. While existing studies use granular data to analyze details of fire sale dynamics; in most of these cases, the scope of analysis is focused on a certain jurisdiction or asset class, leaving the cross-jurisdiction or cross-asset spillover dimension out of the scope. To address these points, this paper measures cross-border and cross-asset spillovers of market shocks ("interlinkage effect") in the GFS using a standard FS model, specifically focusing on the role of NBFIs. With the help of existing FS models, we construct measures of the interlinkage effect across different types of financial institutions, including banks and various types of NBFIs, in Japan's financial system as well as those for the foreign financial system (the U.S. and Euro area) using flow of funds data of these jurisdictions. We find that the interlinkage effect has increased substantially, not only for Japan's financial system, but also for the overseas financial system since the Global Financial Crisis (GFC). These increasing interlinkages of NBFIs with various types of entities suggest there has been a global structural change in the transmission of market shocks.

Keywords: Interconnectedness; NBFI; cross-border spillovers; fire sales; systemic risk (search for similar items in EconPapers)
JEL-codes: G10 G11 G21 G23 (search for similar items in EconPapers)
Date: 2022-09-05
New Economics Papers: this item is included in nep-ban and nep-mon
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Citations: View citations in EconPapers (1)

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