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When margins call: liquidity preparedness of non-bank financial institutions

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  • Macchiati, Valentina
  • Cappiello, Lorenzo
  • Giuzio, Margherita
  • Ianiro, Annalaura
  • Lillo, Fabrizio

Abstract

We propose a novel framework to assess systemic risk stemming from the inadequate liquidity preparedness of non-bank financial institutions (NBFIs) to derivative margin calls. Unlike banks, NBFIs may struggle to source liquidity and meet margin calls during periods of significant asset price fluctuations, potentially triggering asset fire sales and amplifying market volatility. We develop a set of indicators and statistical methods to assess liquidity preparedness and examine risk transmission through common asset holdings and counterparty exposures. Applying our framework to euro area NBFIs during the Covid-19 turmoil and the 2022–2023 monetary tightening, we observe an increase in distressed entities, which, in turn, seem to exhibit more liquidity-driven selling behaviours than their non-distressed peers. Network analysis suggests that certain counterparties of distressed entities appear particularly vulnerable to margin call-induced liquidity shocks. Our framework offers policymakers valuable tools to enhance the monitoring and resilience of the NBFI sector. JEL Classification: C02, E52, G01, G11, G23

Suggested Citation

  • Macchiati, Valentina & Cappiello, Lorenzo & Giuzio, Margherita & Ianiro, Annalaura & Lillo, Fabrizio, 2025. "When margins call: liquidity preparedness of non-bank financial institutions," Working Paper Series 3074, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20253074
    Note: 234084
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    References listed on IDEAS

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    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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