Non-bank financial intermediaries and financial stability

BIS Working Papers  |  No 972  | 
29 October 2021



The heft of non-bank financial intermediaries (NBFIs) in the financial system has grown significantly since the Great Financial Crisis. We look at the main drivers and consequences of their ascent, focusing on NBFIs' effect on the demand for and supply of liquidity. We develop a framework of systemic-risk propagation through NBFIs that allows us to provide a unified reading of market disruptions during the Covid-19 pandemic.


We develop a risk accounting framework that describes how NBFIs' risk-taking capacity evolves during periods of market distress. The key element of our setup is that fluctuations in leverage, due to changes in margins, can rapidly affect the amount of financial intermediation NBFIs perform. This perspective is useful to understand episodes of sudden liquidity disruptions in markets where NBFIs are major participants.


NBFIs' prominent role has brought benefits by diversifying funding sources, but it has also exacerbated some liquidity imbalances that can, in extreme cases, endanger financial stability. Our framework implies that sharp increases in margins, especially after a protracted period of thin margins, will tighten financial conditions for the system as a whole. It also points to a tight link between deleveraging and "dash for cash", as during the Covid-19 pandemic. The systemic relevance of NBFIs raises questions about the appropriate policy strategies. In particular, there is an important correspondence between access to public resources and oversight.


The heft of non-bank financial intermediaries (NBFIs) has grown significantly after the Great Financial Crisis. 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. An investor's debt capacity is increasing in that 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 stress propagation channels. These findings have implications for the design of NBFI regulations and of central bank backstops.

Keywords: financial intermediation, non-banks, market-based finance, market liquidity, systemic risk.

JEL classification: G22, G23, G28.