The 2023 edition of the EU Non-bank Financial Intermediation Risk Monitor (NBFI Monitor) analyses systemic risks and vulnerabilities associated with investment funds and other financial institutions. For the first time, this edition extends the monitoring universe to crypto-assets as well as stablecoins, centralised finance platforms and decentralised finance protocols. It is pertinent to note that there are certain assets/platforms that provide financial intermediation and, accordingly, may be exposed to the same vulnerabilities and financial risks as the traditional financial sector.

Financial stability risks increased in 2022, owing to rising geopolitical tensions, higher-than-expected inflation and tightening financial conditions. Against this backdrop, the NBFI Monitor highlights three main risks and vulnerabilities:

• An economic slowdown and tightening of financial conditions could increase credit risk. This is particularly relevant for investment funds exposed to low-rated bonds and loans, financial vehicle corporations engaged in securitisation and financial corporations engaged in lending.
• Market liquidity risk could put further pressure on non-bank financial intermediaries engaged in liquidity transformation. Several indicators show that liquidity conditions in EU bond markets deteriorated in 2022.
• Excessive use of leverage could amplify liquidity and market risks, lead to contagion and magnify shocks to financial stability. This vulnerability affects the traditional non-bank entities discussed in the report as well as crypto intermediaries, since both use leverage and rely on collateral.

ESRB, June 2023 - Read the Publication or Read the Press Release.