The Spillover Risk of Stress in the NBFI Sector on Banks: Examining Direct Impacts and Interconnectedness
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Spillover risk to banks
The previous section looked at the most prominent risks for the NBFI sector. However, no data currently exists to make an estimation of the potential impact on banks if these institutions were to see significant stress events. Nonetheless, we can identify some direct and indirect channels through which stress on NBFIs would affect banks.
Direct impacts
Firstly, most banks rely on NBFIs for funding, as shown in the previous graphs. Stress in the sector might directly affect banks’ ability to fund themselves, possibly leading to a sudden shock in funding costs.
Secondly, banks have exposure to these NBFIs, which may lead to credit risk for banks. Some pain on the asset side, however, would not bring the typical NBFI down and the hit would mostly be taken by investors in the funds.
The Bank of International Settlements highlighted in the graph below, the different direct exposure that banks can have to NBFIs, and thus the potential direct impacts. It also makes clear the strong interconnectedness and resulting lack of transparency of both sectors.
Illustrative examples of assets and liabilities links between banks and NBFIs
