ECB and ESRB issue joint report analysing financial stability risks from linkages between banks and the non-bank financial intermediation sector

The European Central Bank (ECB) and the European Systemic Risk Board (ESRB) today published a joint report entitled “Financial stability risks from linkages between banks and the non-bank financial intermediation sector”. The report finds linkages between banks and the non-bank financial intermediation (NBFI) sector to be significant, and while they do not currently pose acute risks to financial stability, they create important vulnerabilities that could amplify stress in adverse market conditions. Furthermore, these vulnerabilities are highly concentrated in a small number of large euro area global systemically important banks (G-SIBs). Risk-bearing capacity among euro area G-SIBs is key to absorbing shocks in the financial system and preventing the amplification of financial stress.

The report identifies three important and interlinked roles played by banks in interactions with the NBFI sector: liquidity management, provision of leverage and market-making. It analyses how interactions between banks and NBFIs may affect financial stability in the EU.

These three roles may lead to the materialisation of systemic risks through two main channels.