The European Central Bank published a Financial Stability Review special feature assessing how linkages between euro area banks and the non-bank financial intermediation (NBFI) sector could generate systemic risk. It identifies two main transmission channels: vulnerabilities from banks’ short-term liabilities to NBFI entities that can be prone to outflows, and risks from banks’ provision of leverage and market intermediation services to leveraged NBFIs that could amplify asset price shocks through deleveraging and fire sales, with exposures concentrated in a small set of euro area global systemically important banks (G-SIBs). On the liability side, euro area banks fund around 15% of assets through liabilities to NBFIs, with about 60% in very short-term deposits and repos and a large share in overnight and foreign currency repo borrowing. Concentration is pronounced, with the top five banks (all G-SIBs) accounting for roughly 65% of banks’ repo borrowing from NBFIs, and some banks with high reliance on NBFI funding also holding comparatively low liquidity buffers. On the asset side, exposures to NBFIs are about 10% of total assets and are often short-dated and collateralised, but still create counterparty and step-in risk, including via intragroup linkages (at least 55% of credit exposures to other financial intermediaries are intragroup). Around €432 billion, or 26%, of the €1.66 trillion of identifiable bank exposures to NBFIs is linked to potentially leveraged firms, with G-SIBs and investment banks more exposed, mainly through repo lending to hedge funds and exposures to risky trading and securities firms. Repo intermediation has more than doubled since 2021 and is highly concentrated, with five banks accounting for about 80% of reverse repo claims on NBFIs, while banks’ matched repo and derivatives books still leave them exposed to systemic liquidity and counterparty risks. The ECB notes material data constraints, including limited visibility on the balance sheets of leveraged NBFIs outside the EU and gaps in granular reporting for some cross-border activity and deposit funding. It signals further work to examine additional linkages such as ownership connections and to explore combining AnaCredit with data collected under the Alternative Investment Fund Managers Directive to deepen analysis of leveraged fund financing and concentration risks.
European Central Bank 2025-11-25
European Central Bank study highlights systemic liquidity and leverage risks from concentrated bank ties to non-bank financial intermediaries
The European Central Bank's Financial Stability Review highlights systemic risks from euro area banks' linkages with the non-bank financial intermediation sector. Key vulnerabilities include banks' reliance on short-term liabilities to NBFIs and the provision of leverage to leveraged NBFIs, which could amplify asset price shocks. The review notes significant data constraints and signals further analysis of ownership connections and leveraged fund risks.