Risk Propagation in the European Banking System: Amplification Effect from NBFIs and Market Risks

Laura Valderrama and Richard Varghese

No 2026/033, IMF Working Papers from International Monetary Fund

Abstract: This paper applies network analysis to examine the impact of non-bank financial institutions (NBFIs) and financial market stress on contagion risk within the interbank network. Using network-based simulations on euro area banks’ supervisory data, we find that banks’ strong capital and liquidity buffers significantly reduce contagion through interbank exposures: base-line scenarios show only modest capital losses and no cascading defaults. In contrast, stress originating from NBFIs under heightened market volatility markedly amplifies systemic risk. These findings highlight NBFIs and market volatility as key amplifiers of financial stress in the euro area. Our findings call for integrating contagion models into system-wide stress testing and designing macroprudential policies that encompass the entire financial ecosystem. Such policies should account for amplification risks from banks’ NBFI exposures when calibrating buffers and identifying systemic institutions.

Keywords: Systemic Risk; Network Analysis; Interconnectedness; NBFIs; Market Risk; risk propagation; amplification risk; impact of non-bank financial institutions; cascading default; nbfi risk; Nonbank financial institutions; Commercial banks; Credit; Global systemically important banks; Global (search for similar items in EconPapers)
Pages: 34
Date: 2026-02-20
New Economics Papers: this item is included in nep-cba and nep-eec
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