Macroprudential policy, monetary policy and non-bank financial intermediation

This paper examines the interplay between macroprudential policy, monetary policy and the non-bank financial intermediation (NBFI) sector, drawing on recent research and zooming in particularly on evidence from the euro area2. It documents the growth in the NBFI sector over the past two decades and its particular role in financing the real economy, assesses systemic risks that can emanate from the sector, considers how it interacts with monetary policy, and discusses the implications for macroprudential regulation. Firms are increasingly turning to capital markets for debt financing, with the NBFI sector thereby increasing its provision of credit to the real economy relative to banks. At the same time, the growth of market-based finance has been accompanied by increased liquidity and credit risk in the NBFI sector, together with pockets of high leverage. Monetary policy has also intersected with these dynamics. Recent episodes have shown that vulnerabilities in the NBFI sector can amplify market dynamics and create systemic risk in a highly interconnected financial system. Against this backdrop, the resilience of the NBFI sector should be strengthened, including from a macroprudential perspective, to support financial stability and the smooth transmission of monetary policy. Several open issues and challenges remain for future research and policy making. JEL Classification: G01, G23, G28