Template-Type: ReDIF-Paper 1.0
Author-Name: Sirio Aramonte
Author-X-Name-First: Sirio
Author-X-Name-Last: Aramonte
Author-Name: Andreas Schrimpf
Author-X-Name-First: Andreas
Author-X-Name-Last: Schrimpf
Author-Name: Hyun Song Shin
Author-X-Name-First: Hyun
Author-X-Name-Last: Song Shin
Title: Non-bank financial intermediaries and financial stability
Abstract: The heft of non-bank financial intermediaries (NBFIs) in the financial system has grown significantly after the Great Financial Crisis of 2008. This paper reviews structural shifts in intermediation and how NBFIs have shaped the demand and supply of liquidity in financial markets. We then lay out a framework for the key channels of systemic-risk propagation in the presence of NBFIs, emphasising the central role of leverage fluctuations through changes in margins. The debt capacity of an investor is increasing in the debt capacity of other investors in the system, so that leverage enables greater leverage, and spikes in margins can lead to system-wide deleveraging. In our framework, deleveraging and `dash for cash' scenarios (as during the Covid-19 crisis) emerge as two sides of the same coin, rather than being two distinct channels of stress propagation. These findings have implications for the design of NBFI regulations and of central bank backstops.
Length: 48 pages
Creation-Date: 2021-10
File-URL: https://www.bis.org/publ/work972.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work972.htm
File-Format: text/html
Number: 972
Keywords: financial intermediation, non-banks, market-based finance, market liquidity, systemic risk
Classification-JEL: G22, G23, G28
Handle: RePEc:bis:biswps:972