When margins call: liquidity preparedness of non-bank financial institutions

Valentina Macchiati, Lorenzo Cappiello, Margherita Giuzio, Annalaura Ianiro and Fabrizio Lillo

No 3074, Working Paper Series from European Central Bank

Abstract: We propose a novel framework to assess systemic risk stemming from the inadequate liquidity preparedness of non-bank financial institutions (NBFIs) to derivative margin calls. Unlike banks, NBFIs may struggle to source liquidity and meet margin calls during periods of significant asset price fluctuations, potentially triggering asset fire sales and amplifying market volatility. We develop a set of indicators and statistical methods to assess liquidity preparedness and examine risk transmission through common asset holdings and counterparty exposures. Applying our framework to euro area NBFIs during the Covid-19 turmoil and the 2022–2023 monetary tightening, we observe an increase in distressed entities, which, in turn, seem to exhibit more liquidity-driven selling behaviours than their non-distressed peers. Network analysis suggests that certain counterparties of distressed entities appear particularly vulnerable to margin call-induced liquidity shocks. Our framework offers policymakers valuable tools to enhance the monitoring and resilience of the NBFI sector. JEL Classification: C02, E52, G01, G11, G23

Keywords: derivative margin calls; financial stability; liquidity risk; network analysis; non-bank financial institutions (search for similar items in EconPapers)
Date: 2025-07
New Economics Papers: this item is included in nep-mon
Note: 234084
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