The European Central Bank published a working paper reviewing research on how macroprudential policy and monetary policy interact with the expanding non-bank financial intermediation (NBFI) sector, with a particular focus on the euro area. It argues that as firms rely more on market-based finance supplied by non-banks, vulnerabilities in the sector can amplify market stress, create systemic risk in an interconnected financial system, and complicate the smooth transmission of monetary policy. The paper documents that euro area non-bank financial sector assets more than doubled since 2010, rising from 50% to close to 100% of banking sector assets in 2023, with investment funds managing over EUR 16 trillion and insurance corporations and pension funds holding over EUR 11 trillion. It highlights key risk channels including liquidity mismatch in money market funds and open-ended investment funds, pockets of high leverage, and liquidity strains linked to margin and collateral calls, drawing on recent stress episodes such as March 2020 and the UK liability-driven investment turmoil in 2022. Regulatory discussion centres on strengthening NBFI resilience from a macroprudential perspective, including measures to mitigate liquidity mismatch, improve liquidity preparedness to meet margin and collateral calls, and address leverage, alongside the need for coordination across jurisdictions. The paper also sets out five areas for further policy and research work, covering improved data and information sharing, enhanced risk modelling and system-wide stress testing, time-varying macroprudential instruments for NBFIs, approaches to tackle systemic spillovers from systemically important non-bank entities or activities, and the trade-offs between private and public liquidity provision during crises.
European Central Bank 2025-10-02
European Central Bank working paper analyses macroprudential and monetary policy risks from non-bank financial intermediation growth
The European Central Bank released a working paper examining the interaction between macroprudential and monetary policy with the growing non-bank financial intermediation (NBFI) sector in the euro area. It highlights the doubling of non-bank financial sector assets since 2010 and identifies key risks like liquidity mismatches and high leverage. The paper calls for enhanced NBFI resilience through improved data sharing, risk modelling, and coordinated regulatory measures.