European Systemic Risk Board and European Central Bank publish joint report on financial stability risks from bank linkages to non-bank financial intermediation

The European Central Bank and the European Systemic Risk Board published a joint report assessing financial stability risks from EU bank linkages with the non-bank financial intermediation (NBFI) sector. It finds these linkages are significant and, while not currently posing acute financial stability risks, they create vulnerabilities that could amplify stress in adverse market conditions, with exposures and vulnerabilities highly concentrated in a small number of large euro area global systemically important banks (G-SIBs). The analysis groups banks’ interactions with NBFIs into liquidity management, provision of leverage and market-making, and identifies two main systemic risk channels. One channel is a potential loss of short-term funding from NBFIs to banks during market tension, including through NBFI redemptions and margin calls that reduce NBFI funding. The second channel is bank lending to leveraged NBFIs, including hedge funds and securities firms borrowing via repo for short-term trading, which can lead to position unwinds and asset fire sales, and to credit losses where leveraged NBFIs invest in illiquid long-term assets. The report draws on granular transaction and exposure-level data but highlights constraints from data gaps and fragmented access, especially missing information on exposures and transactions outside the EU, and points to improved information sharing and a centralised mechanism for data access and sharing as potential remedies.