The Bank of England published Staff Working Paper No. 1,156 by Manuel Gloria and Chiara Punzo, presenting a DSGE model in which commercial bank capital requirements become binding only in stressed states and non-bank financial institutions (NBFIs) operate outside the capital regime. The paper’s core result is that NBFIs can amplify the contractionary effects of monetary policy, mainly via the asset price channel, with the amplification strongest in the left tail of the GDP distribution and still pronounced under zero lower bound conditions. The model introduces asymmetric, state-dependent capital adjustment costs that activate only when a bank’s capital ratio falls below a threshold, making loan-deposit spreads sensitive to capital shortfalls but not to surpluses. In the NBFI sector, tighter monetary policy reduces the market value of bonds held by NBFIs, eroding their net worth and lending capacity and limiting their ability to offset reduced bank credit, which increases downside GDP-at-risk. The paper contrasts these short-run vulnerabilities with a long-run trade-off: a greater share of NBFI lending is associated with higher welfare in the model. As a staff working paper, it is published to elicit comments and debate and does not represent Bank of England policy.
Bank of England 2025-11-21
Bank of England publishes staff working paper modelling how non-bank intermediaries and state-dependent bank capital requirements shape monetary policy transmission
The Bank of England's Staff Working Paper No. 1,156 explores a DSGE model where commercial bank capital requirements are binding only in stressed states, while non-bank financial institutions (NBFIs) operate outside this regime. The study finds that NBFIs can amplify the contractionary effects of monetary policy, particularly through the asset price channel, significantly impacting GDP distribution. The paper highlights short-run vulnerabilities and a long-run trade-off, noting that increased NBFI lending correlates with higher welfare.