Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/334934 
Year of Publication: 
2025
Series/Report no.: 
ECB Working Paper No. 3074
Publisher: 
European Central Bank (ECB), Frankfurt a. M.
Abstract: 
We propose a novel framework to assess systemic risk stemming from the inadequate liquidity preparedness of non-bank financial institutions (NBFIs) to derivative margin calls. Unlike banks, NBFIs may struggle to source liquidity and meet margin calls during periods of significant asset price fluctuations, potentially triggering asset fire sales and amplifying market volatility. We develop a set of indicators and statistical methods to assess liquidity preparedness and examine risk transmission through common asset holdings and counterparty exposures. Applying our framework to euro area NBFIs during the Covid-19 turmoil and the 2022-2023 monetary tightening, we observe an increase in distressed entities, which, in turn, seem to exhibit more liquidity-driven selling behaviours than their non-distressed peers. Network analysis suggests that certain counterparties of distressed entities appear particularly vulnerable to margin call-induced liquidity shocks. Our framework offers policymakers valuable tools to enhance the monitoring and resilience of the NBFI sector.
Subjects: 
Non-bank Financial Institutions
Derivative margin calls
Liquidity risk
Network analysis
Financial stability
money-market liquidity
financial risk
financial institution
financial market
insurance company
investment company
pension fund
financial derivative
report
JEL: 
C02
E52
G01
G11
G23
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-7391-5
Document Type: 
Working Paper

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