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Non-bank financial intermediation in the euro area: implications for monetary policy transmission and key vulnerabilities

Lorenzo Cappiello, Fédéric Holm-Hadulla, Angela Maddaloni (), Sergio Mayordomo (), Robert Unger, Laura Arts, Nicolas Meme, Ioannis Asimakopoulos (), Petros Migiakis (), Caterina Behrens, Alban Moura, Stefano Corradin, Giulio Nicoletti, Annalisa Ferrando, Juha Niemelä, Margherita Giuzio, Annelie Petersen, Brian Golden, Olivier Pierrard (), Giovanni Guazzarotti, Lev Ratnovski, Adam Gulan (), Alexandra Schober-Rhomberg, Andreas Hertkorn, Michael Sigmund, Christoph Kaufmann, Carla Soares (), Lucía Kazarian Avakian, Patricia Stupariu, Kimmo Koskinen, Marco Taboga (), Franck Sédillot, Luis Miguel Tavares, Jani Matilainen, Emme Van den Boom, Falk Mazelis, Andrea Zaghini () and Barra McCarthy

No 270, Occasional Paper Series from European Central Bank

Abstract: The financing structure of the euro area economy has evolved since the global financial crisis with non-bank financial intermediation taking a more prominent role. This shift affects the transmission of monetary policy. Compared with banks, non-bank financial intermediaries are more responsive to monetary policy measures that influence longer-term interest rates, such as asset purchases. The increasing role of debt securities in the financing structure of firms also leads to a stronger transmission of long-rate shocks. At the same time, short-term policy rates remain an effective tool to steer economic outcomes in the euro area, which is still highly reliant on bank loans. Amid a low interest rate environment, the growth of market-based finance has been accompanied by increased credit, liquidity and duration risk in the non-bank sector. Interconnections in the financial system can amplify contagion and impair the smooth transmission of monetary policy in periods of market distress. The growing importance of non-bank financial intermediaries has implications for the functioning of financial market segments relevant for monetary policy transmission, in particular the money markets and the bond markets. JEL Classification: E4, E5, G2, G38

Keywords: Asset purchases; Financial markets stress; Low interest rates; Monetary policy transmission; Non-bank intermediation; Risk-taking (search for similar items in EconPapers)
Date: 2021-09
New Economics Papers: this item is included in nep-cba, nep-eec, nep-ifn, nep-isf, nep-mac and nep-mon
Note: 234084
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Handle: RePEc:ecb:ecbops:2021270