Isabel Schnabel: COVID-19 and the liquidity crisis of non-banks - lessons for the future

Speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at the Financial Stability Conference on "Stress, Contagion, and Transmission", organised by the Federal Reserve Bank of Cleveland and the Office of Financial Research, Frankfurt am Main, 19 November 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

The reforms that followed the global financial crisis of 2008 have made our financial system safer and more resilient. Tighter regulation and higher capital ratios have been key factors enabling banks to act as shock absorbers rather than shock amplifiers during the coronavirus (COVID-19) pandemic.

At the same time, the crisis has been a stark reminder that there are still considerable vulnerabilities in the financial sector. In particular, there has been a divergence between the comparatively lean regulation of the non-bank financial sector and its increasing role in financial intermediation across the globe. This divergence has measurably augmented the risks of perilous macro-financial feedback loops, which may also affect the conduct of monetary policy.

In my remarks today, I will discuss how prevailing structural fault lines caused a liquidity crisis in the non-bank financial sector in the spring, which amplified market stress, including through forced asset sales, and how monetary policy had to respond to stabilise markets. I will then explore some of the regulatory gaps that need to be closed with a view to both strengthening the resilience of the financial sector and mitigating the risk of financial dominance.

The expansion of the non-bank sector

The financial sector landscape in the euro area has changed significantly over the past decade.