European Central Bank and European Systemic Risk Board publish joint report highlighting concentrated systemic vulnerabilities from bank links to non-bank financial intermediaries

The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) published a joint report on financial stability risks from linkages between banks and the non-bank financial intermediation (NBFI) sector, concluding that bank-NBFI connections are significant and, while not currently posing acute risks, can create vulnerabilities that could amplify stress in adverse market conditions. The report finds these vulnerabilities to be highly concentrated in a small number of large euro area global systemically important banks (G-SIBs). The analysis identifies three interlinked roles banks play in relation to NBFIs: liquidity management, provision of leverage and market-making. It highlights two main systemic risk channels: concentrated short-term funding from NBFIs to banks that could fall sharply during market tension following redemptions and margin calls, and bank lending to leveraged NBFIs, including via repo to hedge funds and securities firms, which can transmit asset price shocks through deleveraging, position unwinds and potential fire sales, generating losses for both banks and NBFIs. The report draws on granular transaction and exposure-level data but notes that data gaps and fragmented access constrain risk assessment, with limited visibility over exposures and transactions outside the EU. It points to improved information sharing, including a centralised mechanism for data access and sharing, as a way to address these constraints.