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Emanuele Franceschi
Christoph Kaufmann
Senior Financial Stability Expert · Macro Prud Policy&Financial Stability, Market-Based Finance
Francesca Lenoci

Non-bank financial intermediaries as providers of funding to euro area banks

Prepared by Emanuele Franceschi, Christoph Kaufmann and Francesca Lenoci

Published as part of the Financial Stability Review, May 2024.

Around 20% of euro area banks’ funding is provided by the non-bank financial intermediation (NBFI) sector. Compared with usually more stable retail sources, NBFI funding mainly consists of market-based instruments, such as bonds and repurchase agreements, with the latter being particularly sensitive to stress events.[1] Leveraging on previous analysis,[2] this box investigates the role of the NBFI sector in providing funding to banks. In this context, the analysis assesses risks to banks in the event of sudden outflows from the NBFI sector with potential knock-on effect on their ability to finance banks. Specifically, we evaluate whether banks can replace their NBFI funding by tapping different instruments or sectors.

Chart A

The share of NBFI funding has increased since 2021, driven by more bond issuance and repo financing

a) Share of funding from the NBFI sector, by bank business model

b) Cumulative changes in euro area banks’ liabilities and share of funding from the NBFI sector

(Q1 2021-Q3 2023, percentages)

(2021-23; left-hand scale: € trillions, right-hand scale: percentages)

Sources: ECB (CSDB, supervisory data, SHS) and ECB calculations.
Notes: Panel a: box-whisker plots based on a sample of 97 euro area banks, where the boxes indicate the interquartile ranges, the dots indicate the median, and the whiskers indicate the 10th and 90th percentiles. AMs stands for asset managers; IB stands for investment banks; G-SIBs stands for global systemically important banks.

The importance of NBFI funding varies with banks’ business models. Investment banks and banks specialised in corporate and wholesale lending often receive about one-third of their funding from NBFI entities (Chart A, panel a). Universal and diversified banks – which dominate the euro area banking sector – and smaller retail banks receive between 5% and 10% of their funding from the NBFI sector. Banks which depended significantly on NBFI funding in 2021 have tapped this source even more over the last two years, while smaller banks further reduced their initially low exposure. In aggregate, the importance of non-bank funding has increased over recent years, with a reduction in central bank funding being partially offset by issuing bonds and borrowing from NBFI entities on secured money markets (Chart A, panel b).

NBFI sectors feature preferred habitats for different asset classes and maturities, leading to a limited degree of substitutability across sectors and funding instruments. Insurance corporations and investment funds hold sizeable amounts of long-term debt securities issued by euro area banks (Chart B, panel a).[3] Other financial institutions and investment funds provide short-term secured funding on repo markets, while money market funds hold large amounts of banks’ commercial paper and certificates of deposit. The concentration by funding source reflects different business models, investment mandates and maturity profiles in NBFI sectors.

Short-term repo funding could be particularly volatile during periods of financial stress. Econometric analysis finds that about 25% of a reduction in repo funding to a given bank by one of its counterparties is replaced by other institutions on the same trading day (Chart B, panel b). However, reductions in repo funding from the NBFI sector could be challenging for banks to replace, potentially forcing them to shrink their balance sheets. For example, a reduction of €1 in repo funding from investment funds correlates with a further reduction of €0.26 in repo funding from other, similar institutions, after controlling for overall changes in banks’ demand for funding.

Chart B

Different NBFI sectors provide different types of bank funding, leading to limited substitutability in the event of lower funding supply

a) Market-based bank funding, by instrument and providing sector

b) Change of bank repo funding after €1 loss of repo funding provided by other banks or non-banks

(Q1 2021, Q4 2023; percentages)

(point estimates and 90% confidence bands, €)

Sources: ECB (CSDB, SFTDS, SHS, supervisory data) and ECB calculations.
Notes: Panel a: ICPFs stands for insurance corporations and pension funds; IFs stands for investment funds; MMFs stands for money market funds; OFIs stands for other financial institutions. Panel b: regressions are based on up to 2,900,000 transaction-level observations for repos between 248 euro area banks and all counterparty entities using daily observations between January 2021 and December 2023. The dependent variable is the one-day change in total repos provided to bank i by all counterparty entities except for entity j. The control variables include the one-day change in repos provided by counterparty j to the bank i as well as dummy interactions for different repo providing sectors. The regressions also include bank time fixed effects to control for bank demand for funding as well as all other bank and time-specific developments. The coefficients show the joint effect of a change in repo funding provided by other banks, non-banks, and investment funds on the total repo funding of bank i.

Some recent episodes of liquidity turmoil in the NBFI sector led to financial stability issues for banks,[4] suggesting that more widespread shocks could affect banks’ ability to secure funding. NBFI entities play a pivotal role as key sources of funding for banks. All in all, this funding has not experienced major systemic stress events over the last few years, despite market shocks and banking sector tensions. Nevertheless, a high concentration of NBFI funding in some banks, together with NBFI sectoral preferences for specific funding instruments, could make swift substitution difficult should funding outflows materialise. In a crisis, uninsured depositors, high-net-worth individuals and professional investors are most likely to run. This creates a vulnerability for banks, in particular as regards short-term repo funding, although the ability to reuse collateral with other counterparties could mitigate these vulnerabilities. Indeed, the turmoil in March 2023 showed that banks facing liquidity difficulties can be at risk of failure, even if they comply with regulatory ratios.

  1. The run on repo during the global financial crisis was driven predominantly by outflows from foreign banks, hedge funds and the NBFI sector; see Gorton, G.B., Metrick, A. and Ross, C.P., “Who Ran on Repo?AEA Papers and Proceedings, Vol. 110, May 2020. Also, banks and corporates with more funding from non-banks were less resilient during the period of acute financial stress in 2020; see Forbes, K., Friedrich, C. and Reinhardt, D., “Stress relief? Funding structures and resilience to the covid shock”, Journal of Monetary Economics, Vol. 137, July 2023, pp. 47-81.

  2. See the special feature entitled “Key linkages between banks and the non-bank financial sector”, Financial Stability Review, ECB, May 2023.

  3. Investment funds also hold the largest amounts of banks’ AT1 bonds, compared with other NBFI sectors.

  4. In March 2020, for example, high, rapid outflows constrained the funding that money markets could provide to banks. In September 2022 the UK mini-budget triggered a sharp fall in gilt prices that affected pension funds. In March 2023 the AT1 market froze following the collapse of Credit Suisse.