The European Systemic Risk Board (ESRB) published the EU Non-bank Financial Intermediation Risk Monitor 2024 (NBFI Monitor), which highlights the key cyclical and structural risks associated with non-bank financial intermediation, specifically investment funds and other financial institutions (OFIs), in 2023.
At the current juncture, structural vulnerabilities in NBFI could amplify cyclical risks to EU financial system stability owing to the impact of higher interest rates. Tighter financing conditions, coupled with slow growth, could amplify credit risk. This could lead to losses and put a strain on non-bank financial intermediaries engaged in liquidity transformation, especially those with direct exposures to interest rate-sensitive sectors such as real estate, or those that rely on leverage.
These risks could materialize in all NBFI segments. This edition of the report shows that high leverage, which is typically associated with alternative investment funds (AIFs), can also build up in some undertakings for collective investment in transferable securities (UCITS) that pursue hedge fund-like strategies. It also explores interconnectedness, including the market footprint of investment funds and OFIs, as well as cross-exposures within the investment fund sector.