## Nonbank Financial Intermediaries: Vulnerabilities amid Tighter Financial Conditions

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**Canonical URL:** [Nonbank Financial Intermediaries: Vulnerabilities amid Tighter Financial Conditions](https://www.imf.org/-/media/files/publications/gfsr/2023/april/english/ch2execsum.pdf)

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### Executive summary — key findings
- Nonbank financial intermediaries (NBFIs) play a key role in the global financial system, enhancing access to credit and supporting economic growth.
- NBFIs’ financial vulnerabilities might have increased in the past amid low interest rates.
- NBFI stress tends to emerge with elevated leverage, liquidity mismatches, and high levels of interconnectedness that often spill over to emerging markets.
- In the current environment of high inflation and tighter financial conditions, central banks can face complex trade-offs during market stress between addressing financial stability risks and achieving price stability objectives.
- Robust surveillance, regulation, and supervision of NBFIs are vital as a first line of defense.

### Policy recommendations and interventions
- Priorities for authorities:
  - Close key data gaps.
  - Incentivize risk management by NBFIs.
  - Set appropriate regulation.
  - Intensify supervision.
- Central bank intervention principles:
  - Aim to address liquidity and not solvency problems.
  - Avoid conflicting with the monetary policy stance, especially in a tightening cycle.
  - Implement appropriate guardrails to mitigate moral hazard.

### Central bank liquidity-support options (three broad types)
1. Discretionary marketwide operations
   - Should be temporary and targeted to NBFI segments where further market dislocation and disintermediation could have adverse financial stability implications.
   - Designed to restore market functioning while containing moral hazard.
   - Timing is critical; a framework should be in place based on “discretion under constraints.”
   - Data-driven metrics trigger the potential intervention (the constraints); policymakers retain discretion as to whether to intervene.
2. Access to standing lending facilities
   - Could be granted to reduce spillovers to the financial system.
   - The bar for such access should be very high to avoid moral hazard.
   - Access should not be granted without the appropriate regulatory and supervisory regimes for the different types of NBFIs (some of which may not qualify).
3. Central bank as lender of last resort for systemic NBFIs
   - Lending to a systemic NBFI should be at the discretion of the central bank, at a penal rate, fully collateralized, and accompanied by more supervisory oversight.
   - A clear timeline should be established for restoring the liquidity of the institution.

### Communication and coordination
- Clear communication is critical to avoid perceptions that central bank actions are working at cross-purposes (for example, purchasing assets to restore financial stability while continuing quantitative tightening to bring inflation back to target).
- Announcements of central bank liquidity support should clearly explain the financial stability objective and the parameters of the program.
- Coordination between the central bank and financial sector regulators is essential for risk identification, crisis management, and assessment of supervisory and regulatory deficiencies.

*https://www.imf.org/-/media/files/publications/gfsr/2023/april/english/ch2execsum.pdf*

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_Source: https://www.imf.org/-/media/files/publications/gfsr/2023/april/english/ch2execsum.pdf_