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Rise of NBFIs and the Global Structural Change in the Transmission of Market Shocks

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  • Yoshihiko Hogen

    (Bank of Japan)

  • Yoshiyasu Koide

    (Bank of Japan)

  • Yuji Shinozaki

    (Bank of Japan)

Abstract

The March 2020 market turmoil raised concerns over vulnerabilities associated with the increasing market interconnectedness with Non-Bank Financial Intermediaries (NBFIs), most notably investment funds, in the global financial system (GFS). Studies on the measurement of fire sale vulnerabilities in part those associated with NBFIs in a financial system are often conducted at the jurisdiction level using fire-sale (FS) models. While existing studies use granular data to analyze details of fire sale dynamics; in most of these cases, the scope of analysis is focused on a certain jurisdiction or asset class, leaving the cross-jurisdiction or cross-asset spillover dimension out of the scope. To address these points, this paper measures cross-border and cross-asset spillovers of market shocks ("interlinkage effect") in the GFS using a standard FS model, specifically focusing on the role of NBFIs. With the help of existing FS models, we construct measures of the interlinkage effect across different types of financial institutions, including banks and various types of NBFIs, in Japan's financial system as well as those for the foreign financial system (the U.S. and Euro area) using flow of funds data of these jurisdictions. We find that the interlinkage effect has increased substantially, not only for Japan's financial system, but also for the overseas financial system since the Global Financial Crisis (GFC). These increasing interlinkages of NBFIs with various types of entities suggest there has been a global structural change in the transmission of market shocks.

Suggested Citation

  • Yoshihiko Hogen & Yoshiyasu Koide & Yuji Shinozaki, 2022. "Rise of NBFIs and the Global Structural Change in the Transmission of Market Shocks," Bank of Japan Working Paper Series 22-E-14, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp22e14
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    Cited by:

    1. Yoshiyasu Koide & Yoshihiko Hogen & Nao Sudo, 2022. "Increasing Portfolio Overlap of Japanese Regional Banks with Global Investment Funds and Its Financial Stability Implications," Bank of Japan Working Paper Series 22-E-15, Bank of Japan.

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    More about this item

    Keywords

    Interconnectedness; NBFI; cross-border spillovers; fire sales; systemic risk;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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