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Glossary
vii
Glossary
ABCP
Asset Backed Commercial Paper
ALM
Asset-Liabilities Model
BCBS
Basel Committee on Banking Supervision
CCPs
Central Clearing Counterparties
CDS
Credit Default Swap
CGFS
Committee on the Global Financial System
ECB
European Central Bank
EMIR
European Market Infrastructure Regulation
ETF
Exchange Traded Funds
FSB
Financial Stability Board
FVCs
Financial Vehicle Corporations
MFIs
Monetary Financial Institutions (Banks)
MMFs
Money Market Funds
NAV
Net Asset Value
NBFIs
Non-Bank Financial Institutions
OFIs
Other Financial Institutions
OTC
Over The Counter
TR
Trade Repository
Member State abbreviations
BE
Belgium
BG
Bulgaria
CZ
Czech Republic
DK
Denmark
DE
Germany
EE
Estonia
EL
Greece
ES
Spain
FR
France
IE
Ireland
IT
Italy
CY
Cyprus
LV
Latvia
LT
Lithuania
LU
Luxembourg
HU
Hungary
MT
Malta
NL
Netherlands
AT
Austria
PL
Poland
PT
Portugal
RO
Romania
SI
Slovenia
SK
Slovakia
FI
Finland
SE
Sweden
UK
United Kingdom
Glossary
viii
Executive summary
ix
Executive summary
Over the past decade, and in particular since the crisis started, the sector of the non-bank financial
institutions (NBFIs) of the EU27 has grown in importance in terms of financial stability, as reflected
in its strong increase in size and growing interconnectedness with the banking sector. As result,
policy-makers have proceeded in gaining a better understanding of the nature and the role of the
various non-bank financial institutions and their potential impact on financial stability.
Part of the difficulty of assessing the impact of non-bank financial institutions on financial stability
is the wide range of institutions involved. The study examines in great detail the (i) money market
funds, (ii) private equity firms, (iii) hedge funds, (iv) pension funds and insurance undertakings, (v)
central counterparties, and UCITS and exchange traded funds (ETFs).
The report addresses the risks run by each of the several types of non-bank financial institutions
(credit, counterparty, liquidity, redemption, fire sales risk, etc.). These risks are magnified as a
result of multipliers, a.o. size, inter-connectedness, but also regulatory features.
The proposed framework for analysing risks to the financial stability of NBFIs is intended to
categorise a wide range of underlying and proximate causes and set out how these relate to a
common set of risks to financial stability and impacts on the financial system. The framework may
also be useful for policy development, analysis and tracking. For instance, in focusing on
underlying causes as opposed to proximate causes of financial instability.
The framework distinguishes between causes and proximate causes. Underlying causes relate to
the characteristics of individual non-bank financial sectors or connections between a non-bank
financial sector and banks/other non-bank financial sectors that bring about the build-up of risks
to financial instability. Meanwhile, proximate causes relate to factors that trigger the
materialisation of these risks (see figure 1 below).
Risks to financial stability are broadly considered as risks to financial intermediation, or risks that
threaten the flow of capital from investors to users of funds.
The impacts of risks are magnified as a result of multipliers. These include size and inter-
connectedness particularly. That is, the larger the institutions involved, the bigger the effect of any
risk to financial stability materialising. Similarly, the more inter-connected the institutions involved
the bigger the effect insofar as there are likely to be a greater number of institutions involved.
Regulatory features can also act as a multiplier.
Money market funds were not the primary cause of financial crisis but played an important role via
second-round effects. The collapse of the market for asset-backed commercial paper, for instance,
led investors to withdraw from money markets due to perceptions over the funds' exposures to
asset backed commercial paper. The resultant contraction of assets held within these funds led to
important feedback loops that exacerbated the impact of the financial crisis. Specifically, non-
government or corporate issuers' exposure to funding liquidity risk increased substantially as
money market funds were not intermediating in longer-dated money market instruments/prime
money market instruments.
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