ECB Paper Examines Macroprudential Policy for Growing Non-Bank Financial Sector
SDG 8: Decent Work & Economic Growth | SDG 16: Peace, Justice & Strong Institutions
Institutions: Reserve Bank of India | Ministry of Finance
The European Central Bank (ECB) has released a paper (Oct 2025) on how macroprudential policy (rules to protect the financial system as a whole) and monetary policy (interest rates and liquidity set by central banks) interact with the rise of non-bank financial intermediaries (NBFIs) such as mutual funds, insurers, and pension funds. In the euro area, these institutions have grown rapidly, now holding a large share of financial assets outside traditional banks.
While NBFIs broaden credit access, the paper warns they also carry vulnerabilities. These include liquidity mismatches (borrowing short-term but investing long-term), leverage cycles (piling on debt in booms and cutting back in downturns), redemption runs (mass investor withdrawals that force fire sales), and cross-market contagion (stress in one market spreading quickly to others). The ECB finds that central bank policies, like prolonged low interest rates, have encouraged NBFI growth but sometimes magnify these risks.
To address this, the authors call for macroprudential tools tailored for NBFIs: liquidity buffers, collateral safeguards, stronger stress testing, and closer cross-border regulatory cooperation.
For India, where the mutual fund industry manages over ₹55 trillion AUM and NBFCs remain critical credit providers, the ECB findings highlight the need for RBI, SEBI, and the Ministry of Finance to design systemic safeguards beyond banks.
What is NBFI? → Non-Bank Financial Intermediaries are financial entities such as mutual funds, insurers, and pension funds that provide credit or liquidity but are not traditional banks. They enhance market depth but can also transmit shocks during crises. This includes mutual funds, pension funds, insurers, NBFCs, housing finance companies, microfinance institutions, etc.
What is NBFC → Non-Banking Financial Company form a specific sub-set of NBFIs in India, legally defined and regulated by the RBI. NBFCs operate somewhat like banks (loans, credit, leasing, infrastructure finance, vehicle loans, etc.) but cannot accept demand deposits like savings/current accounts.
What is Macroprudential Policy? → Regulatory tools aimed at safeguarding the financial system as a whole, not just individual banks. It includes rules like countercyclical capital buffers or limits on risky lending to reduce systemic risk and prevent crises.
What is Monetary Policy? → The use of interest rates, money supply, and liquidity operations by a central bank (like RBI) to control inflation, support growth, and stabilise the economy. Monetary policy affects credit costs, savings, and investment across the system.
What are Liquidity Mismatches? → When financial institutions fund long-term investments (like loans or bonds) with short-term borrowings (like deposits). If investors suddenly demand cash, firms may struggle to pay back quickly — triggering instability.
What are Leverage Cycles? → Periods when institutions take on more debt (high leverage) during good times to boost returns, and then cut back sharply during downturns. These cycles can amplify booms and busts in the financial system.
What are Redemption Runs? → A wave of investors withdrawing money simultaneously from funds (like mutual funds) due to fear or market stress. This forces funds to sell assets quickly, often at a loss, spreading panic further.
What is Cross-Market Contagion? → When stress in one part of the financial system (say bond markets) spreads rapidly to others (like equities, insurance, or banks). Interconnected portfolios and shared exposures make shocks travel across markets.
Follow the full paper here: ECB Working Paper 3130