Non-Bank Financial Intermediation and Transmission of Systemic Risk

Abstract:

This paper develops a stock-flow consistent (SFC) model to analyze the amplification and transmission of shocks from non-bank financial intermediaries to the broader UK economy. The model’s innovation lies in disaggregating the insurance and pension funds sector within the SFC model and modelling the insurance sector asset allocation including demand for corporate bonds. We identify these sectors’ risk origins and quantify shock transmission to both financial and non-financial sectors. The model carefully tracks the flows to and from the insurance and pension fund sectors, allowing the quantification of the impact of systemic risks on the broader economy. These include (1) the potential impacts of the UK 2022 Gilt crisis on the wider economy without Central Bank intervention, (2) changes in insurance capital regulation, (3) the effect of higher corporate debt issuance to insurance in the UK economy, (4) and risk to financial stability arising from waves of corporate debt distress.

Stephen Millard, National Institute of Economic and Social Research (NIESR). 

Organised by Finance Department joint with CBID