Patrick Montagner, Member of the Supervisory Board of the ECB, writes in Eurofi Magazine about the rising role of non-bank financial institutions (NBFIs) and the risks they pose to financial stability. While NBFIs now represent more than half of euro area financial sector assets, their diversity in size, business models, and regulatory treatment makes oversight complex.
Key points:
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Transmission channels of risk:
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Links to the economy: Money market funds provide short-term financing to firms, but sudden redemptions during stress can trigger liquidity mismatches and spillovers.
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Links to banks: Banks and NBFIs are interconnected through derivatives, prime brokerage, and direct exposures. Private market funds in particular create “layered leverage” across investment chains, multiplying vulnerabilities.
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Blurred boundaries: Traditional distinctions between asset managers, insurers, private equity and private credit funds are eroding. Private credit funds, for instance, provide lending functions similar to banks but without equivalent prudential requirements.
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Regulatory and supervisory responses:
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Microprudential banking supervision is increasingly focused on banks’ exposures to NBFIs. The ECB recently ran a scenario analysis on counterparty credit risk, revealing wide differences in banks’ collateral practices.
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A macroprudential approach is essential to capture system-wide risks, supported by the European Systemic Risk Board. Stronger EU-level coordination and integrated NBFI supervision would also foster capital market development.
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Policy priorities:
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Implement international reforms to strengthen NBFIs, especially money market fund resilience and liquidity mismatch in open-ended funds.
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Introduce system-wide stress testing to identify vulnerabilities.
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Improve data access and supervisory cooperation across borders.
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Complement entity-based oversight with an activity-based approach, ensuring all risk-creating activities are within the regulatory perimeter.
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Core message: NBFIs are central to today’s financial system but also create new vulnerabilities through complexity, leverage, and interconnections with banks. Tailored regulation, stronger macroprudential tools, and international coordination are essential to safeguard stability.
