6.1
Analytical framework
The framework for analysing risks to financial stability of NBFIs is intended to categorise a wide
range of underlying and proximate causes and set out how these relate to a common set of risks to
financial stability and impacts on the financial system. The framework may also be useful for policy
development, analysis and tracking. For instance, in focusing in on underlying causes as opposed
to proximate causes of financial instability.
The two main elements of the framework are: underlying causes and proximate causes.
Underlying causes relate to the characteristics of individual non-bank financial sectors or
connections between a non-bank financial sector and banks/other non-bank financial sectors that
bring about the build up of risks to financial instability. Meanwhile, proximate causes relate to
factors that trigger the materialisation of these risks.
Figure 28 below summarises the elements of the framework and their links.
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Assessment of risks to financial stability of sub-sectors of the non-bank financial system
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Figure 28: Analytical framework
Risks to financial stability are broadly considered as risks to financial intermediation, or risks that
threaten the flow of capital from investors to users of funds. There is some emphasis placed on
the banking sector, as it represents a key credit channel. However, other non-bank financial sector
channels can be equally important to financial intermediation (for example, the role of money
markets in channelling investor funds into commercial paper that provides short-term funding to
corporate and others borrowers).
The impacts of risks are magnified as a result of multipliers. These include size and inter-
connectedness particularly. That is, the larger the institutions involved, the bigger the effect of any
risk to financial stability materialising. Similarly, the more inter-connected the institutions involved
the bigger the effect insofar as there are likely to be a greater number of institutions involved.
Regulatory features can also act as a multiplier.
For information, the Basel Committee on Banking Supervision (BCBS) methodology for identifying
systemically important institutions also includes the criteria of 'substitutability' and 'complexity' in
their list of multipliers. Substitutability is the ability to replace the services a given bank/non-bank
financial institution in the event of failure. And, the greater the complexity of an institution the
more systemically important it is due to the uncertainty resulting from the cost and time needed
to uncover its impact on the financial system. These are certainly important in the context of
assessing risks to financial stability.
However, there is less emphasis placed on these two elements in the present study due inter alia
to measurement issues. While substitutability is an important yardstick for how material risks to
financial stability are, it is difficult measure as it is unclear how other institutions would substitute
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