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Non-Bank Financial Institutions and Banks’ Fire-Sale Vulnerabilities

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Abstract

Banks carry significant exposures to nonbanks from direct dealings, but they can also be exposed, indirectly, through losses in asset values resulting from fire-sale events. We assess the vulnerability of U.S. banks to fire sales potentially originating from any of twelve separate nonbank segments and identify network-like externalities driven by the interconnectedness across nonbank types in terms of asset holdings. We document that such network externalities can contribute to very large multiples of an original fire sale, thus suggesting that conventional assessments of fire-sale vulnerabilities can be grossly understated and highlighting the value of treating nonbank financial institutions as one organic whole for monitoring purposes.

Suggested Citation

  • Nicola Cetorelli & Mattia Landoni & Lina Lu, 2023. "Non-Bank Financial Institutions and Banks’ Fire-Sale Vulnerabilities," Staff Reports 1057, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:95843
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    Keywords

    fire sales; externalities; network; financial stability; nonbanks; monitoring;
    All these keywords.

    JEL classification:

    • 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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