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Lighting the shadows: central bank policy transmission through banks and non-banks

Author

Listed:
  • Nicolò Bandera

    (Bank of England and Centre for Macroeconomics)

  • Kristina Bluwstein

    (Bank of England)

  • Michael Kumhof

    (Centre for Macroeconomics)

  • Mauricio Salgado-Moreno

    (Bank of England)

  • Jacob Stevens

    (Bank of England)

Abstract

Non-bank financial institutions (NBFIs) account for an increasingly large share of credit provision and play a central role in quantitative easing (QE). We develop a DSGE model with banks, NBFIs and a central bank interacting through wholesale deposits, bonds and reserve markets to study how monetary transmission changes as the size of NBFIs expands. We estimate the model on UK data to evaluate key parameters in the financial sector. We find that the transmission of conventional interest rate policy to output and inflation is essentially unaffected by the size of the NBFI sector. Conversely, the transmission of QE is strongly altered by the size of the NBFI sector and the source of its expansion. When the NBFI sector expands due to firm funding preferences, this amplifies QE. When it expands due to an increased cost of obtaining bank finance, transmission is largely unchanged. The results underscore that monetary policymakers retain rate control regardless of financial structure, but that the effectiveness of balance sheet policies depends on the composition and behaviour of the non-bank sector.

Suggested Citation

  • Nicolò Bandera & Kristina Bluwstein & Michael Kumhof & Mauricio Salgado-Moreno & Jacob Stevens, 2026. "Lighting the shadows: central bank policy transmission through banks and non-banks," Bank of England Staff Working Paper series 1212, Bank of England.
    • Handle: RePEc:boe:boeewp:023907
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    File URL: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2026/lighting-the-shadows-central-bank-policy-transmission-through-banks-and-non-banks.pdf
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    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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