The European Central Bank and the European Systemic Risk Board have published a joint report warning that growing interconnections between EU banks and the non-bank financial intermediation (NBFI) sector could amplify systemic risks in times of market stress.
While the report finds that current bank-NBFI linkages do not pose immediate threats to financial stability, it highlights significant vulnerabilities, particularly concentrated among a small number of large euro area global systemically important banks (G-SIBs). These banks’ ability to absorb shocks is seen as crucial to preventing wider financial instability.
The analysis identifies three key roles banks play in their interactions with NBFIs: liquidity management, the provision of leverage, and market-making. Systemic risks could materialize through two main channels. First, banks’ reliance on short-term funding from NBFIs could become problematic during market turmoil, especially if asset price shocks trigger large-scale withdrawals and margin calls, reducing funding flows to banks. Second, banks’ lending to leveraged NBFIs—such as hedge funds and securities firms—may indirectly expose them to risky trading strategies, potentially leading to asset fire sales, amplified market volatility and credit losses.
The report is based on granular transaction and exposure-level data, but warns that significant data gaps—particularly regarding exposures and transactions outside the EU—limit a full assessment of risks. The ECB and ESRB call for improved and more centralized data-sharing mechanisms to strengthen oversight of bank-NBFI linkages.
