Risk Propagation in the European Banking System: Amplification Effect from NBFIs and Market Risks

IMF Working Papers, February 20, 2026

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The paper applies network analysis to examine the impact of non-bank financial institutions (NBFIs) and financial market stress on contagion risk within the interbank network.
Using network-based simulations on euro area banks’ supervisory data, baseline scenarios show only modest capital losses and no cascading defaults, indicating that banks’ strong capital and liquidity buffers significantly reduce contagion through interbank exposures.
In contrast, stress originating from NBFIs under heightened market volatility markedly amplifies systemic risk.
The findings highlight NBFIs and market volatility as key amplifiers of financial stress in the euro area.

Network-based simulations applied to euro area banks’ supervisory data.
Analysis focuses on contagion risk within the interbank network, accounting for exposures to NBFIs and market risk conditions.

Integrate contagion models into system-wide stress testing.
Design macroprudential policies that encompass the entire financial ecosystem.
Account for amplification risks from banks’ NBFI exposures when calibrating buffers and identifying systemic institutions.

Subject: Commercial banks, Credit, Financial institutions, Financial sector policy and analysis, Global systemically important banks, Money, Nonbank financial institutions, Systemic risk
Keywords: amplification risk, cascading default, Commercial banks, Credit, Global, Global systemically important banks, impact of non-bank financial institutions, Interconnectedness, Market Risk, nbfi risk, NBFIs, Network Analysis, Nonbank financial institutions, risk propagation, Systemic Risk