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

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.

Keywords: fire sales; externalities; network; financial stability; nonbanks; monitoring;

JEL Classification: G21; G23;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2023-03-01

Number: 1057