The European Central Bank published an article in Macroprudential Bulletin 26 on how leverage in non-bank financial intermediation (NBFI) can generate systemic risk and amplify stress, and on how authorities can strengthen risk identification and the design of ex ante policy tools. The analysis highlights heterogeneous leverage channels across NBFI entities, with vulnerabilities emerging through repo-based financial leverage and derivatives-based synthetic leverage, and points to spillovers observed in episodes such as March 2020 US Treasury market stress, September 2022 UK gilt market stress, and the Archegos failure. It argues that improved transaction-level reporting on derivatives and securities financing transactions supports more timely monitoring, including of investment funds’ growing role in euro area repo markets, but that robust risk-assessment frameworks and better measures of synthetic leverage are needed. The bulletin also discusses evaluating entity-based and activity-based measures using merged datasets, and complements this with a lender-side perspective by using supervisory banking data and stress-testing techniques to assess banks’ counterparty credit risk to NBFIs. As an interim policy step, the article flags implementation of the Financial Stability Board’s minimum haircut framework for securities financing transactions backed by non-government debt collateral, citing euro area evidence that it could materially reduce leverage. It also notes that the Financial Stability Board is developing broader recommendations, including ex ante measures to restrict the build-up of excessive NBFI leverage.
European Central Bank 2025-01-15
European Central Bank sets out monitoring methods and policy options to address non-bank leverage risks
The European Central Bank's Macroprudential Bulletin 26 examines how leverage in non-bank financial intermediation (NBFI) can create systemic risk, highlighting vulnerabilities in repo-based and derivatives-based leverage. It emphasizes the need for improved transaction-level reporting and robust risk-assessment frameworks, and discusses implementing the Financial Stability Board's minimum haircut framework for securities financing transactions. The bulletin also notes ongoing development of broader recommendations to restrict excessive NBFI leverage.