The Impact of NBFIs on Banking Crises: Examining the Role and Risks of Non-Bank Financial Intermediaries

A banking crisis may also be worsened by the presence of NBFIs

We have looked at the effect of stress on the NBFI sector. However, if there is a stress in the banking sector, NBFIs may also exacerbate that stress, even if the are relatively safe themselves. During the banking crisis earlier this year, inflows to US money market funds were at an all-time high. Part of this has correlated with deposit outflows from US banks. In the unlikely, but not impossible, event of a flight from banks into money market funds, this could put banks under severe stress.

 

The largest 'known unknown'

As mentioned before, no data currently exists to allow us to make a clear assessment of the impact on banks if NBFIs were to see significant stress events. The difficulty stems from the lack of data on the sector. Indeed, even though the regulatory requirements vary between NBFI sub-sectors, there remains a general lack of regulation and data requirements. Without data giving a clear overview of NBFIs, one can only broadly estimate where the vulnerabilities stand: which are probably mostly in the US. We also know the vulnerabilities (leverage, liquidity and interconnectedness) as well as the direct and indirect channels through which the risk might propagate to the traditional banking sector. All in all, we see this as the largest "known unknown" risk for the financial system.