NY Fed, Report: Monitoring Banks’ Exposure to Nonbanks, The Network of Interconnections Matters

“We have documented the potential vulnerabilities of banking institutions to fire sales initiated in the NBFI sector when considering both direct spillovers (fire sales of assets that are also held by banks) and indirect, “second-round” spillovers (fire sales that induce further fire sales by other NBFIs that in turn hurt banks). Our analysis sheds light on the intricate network of spillover exposures in the U.S. financial system and identifies a rank ordering of monitoring priorities across NBFI segments. Our framework thus supports the creation of novel monitoring tools.”