Systemic risks in linkages between banks and the non-bank financial sector

Overview

The ECB's Financial Stability Review identifies systemic risks arising from the linkages between euro area banks and non-bank financial intermediaries (NBFIs). These risks are primarily due to short-term liabilities and leveraged credit provision.

Key Insights

• Short-term Liabilities: Euro area banks receive short-term deposit, repo, and debt securities liabilities from NBFIs, which are prone to flight risk and difficult to substitute. This is particularly relevant for global systemically important banks (G-SIBs).
• Leveraged Credit Provision: Banks provide credit to NBFIs that follow leveraged investment strategies, including hedge funds and real estate funds. This could lead to asset price shocks and funding outflows.
• Systemic Risk: The interconnectedness could make banks vulnerable to asset price shocks, leading to deleveraging and reduced leverage provision to NBFIs.

Why It Matters

These linkages could destabilize the euro area banking sector, affecting financial stability and the provision of financial services.

Actionable Implications

• Monitor and manage short-term liabilities from NBFIs to mitigate flight risk.
• Assess the impact of leveraged credit provision on asset price stability.
• Enhance loss-absorbing capacity to ensure resilience during financial stress.