Recent strains at some banks in the US and Europe are a powerful reminder of pockets of elevated financial vulnerabilities built over years of low rates, compressed volatility, and ample liquidity, said a blog by International Monetary Fund writers Antonio Garcia Pascual, Fabio Natalucci and Thomas Piontek.
Such risks could intensify in coming months amid the continued tightening of monetary policy globally, making it especially important to understand and safeguard this broad swath of the financial sector that comprises an array of institutions beyond banks, the blog said. Nonbank Financial Intermediaries, including pension funds, insurers and hedge funds, also play a key role in the global financial system by providing financial services and credit, thus supporting economic growth.
NBFI GROWTH ACCELERATES
The growth of the NBFI sector accelerated after the global financial crisis, now accounting for nearly 50% of global financial assets, the trio said. As such, the smooth functioning of the nonbank sector is vital for financial stability.
However, NBFI vulnerabilities appear to have increased in the past decade, they said. NBFI stress tends to emerge alongside elevated leverage, for example borrowing money to finance their investments or boost returns, or using financial instruments, like derivatives.
Stress also is brought on by liquidity mismatches, where an institution is unable to generate sufficient cash either through liquidation of assets, such as bonds or equities, or use of credit lines to satisfy investor redemption requests, the writers said.
Finally, high levels of interconnectedness among NBFIs and with traditional banks also can become a crucial amplification channel of financial stress, the blog said. Last year’s UK pension fund and liability-driven investment strategies episode underscores the perilous interplay of leverage, liquidity risk and interconnectedness.
Concerns about the country’s fiscal outlook led to a sharp rise in UK sovereign bond yields that, in turn, led to large losses in defined-benefit pension fund investments that borrowed against such collateral, causing margin and collateral calls, the trio said. To meet these calls, pension funds were forced to sell government bonds, pushing their yields even higher.
THE CURRENT ENVIRONMENT
NBFIs now find themselves with the fastest inflation in decades and price stability at the core of most central bank mandates, they said. Injecting central bank liquidity for financial stability could complicate the fight against inflation.
In a low-inflation environment, central banks can respond to financial stress by easing policy, but amid high inflation, challenging tradeoffs may emerge for central banks between fostering financial stability and achieving price stability during periods of stress that may threaten the health of the financial system.
Policymakers need appropriate tools to tackle turmoil in the NBFI sector that may adversely affect financial stability, the IMF blog said.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $174.50 per cwt to $179.28, compared with last week’s range of $174.86 to $184.47 per cwt. FOB dressed steers, and heifers went for $277.47 per cwt to $284.12, compared with $269.25 to $292.35.
The USDA choice cutout Tuesday was up $0.51 per cwt at $307.63 while select was down $1.08 at $287.62. The choice/select spread widened to $20.01 from $18.42 with 120 loads of fabricated product and 21 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $1.55 to $1.65 a bushel over the Jul corn contract, which settled at $6.07 3/4 a bushel, up $0.00 1/4.
No live cattle futures deliveries were tendered Tuesday.
The CME Feeder Cattle Index for the seven days ended Monday was $201.26 per cwt, down $0.98. This compares with Tuesday’s Apr contract settlement of $202.07 per cwt, down $0.47, and May’s $209.42, down $1.32.