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Title: Non-bank Financial Intermediaries and Financial Stability

Author(s): Sirio Aramonte, Andreas Schrimpf and Hyun Song Shin

Publication Date: January 2022

Keyword(s): Financial Intermediation, market liquidity, market-based finance, Non-banks and systemic risk

Programme Area(s): Financial Economics

Abstract: The heft of non-bank financial intermediaries (NBFIs) has grown significantly after the Great Financial Crisis. This paper reviews structural shifts in intermediation and how NBFIs have shaped the demand and supply of liquidity in financial markets. We then lay out a framework for the key channels of systemic-risk propagation in the presence of NBFIs, emphasising the central role of leverage fluctuations through changes in margins. An investor's debt capacity is increasing in that of other investors in the system, so that leverage enables greater leverage, and spikes in margins can lead to system-wide deleveraging. In our framework, deleveraging and `dash for cash' scenarios (as during the Covid-19 crisis) emerge as two sides of the same coin, rather than being two distinct stress propagation channels. These findings have implications for the design of NBFI regulations and of central bank backstops.

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Bibliographic Reference

Aramonte, S, Schrimpf, A and Shin, H. 2022. 'Non-bank Financial Intermediaries and Financial Stability'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16962