The growing presence of non-bank financial institutions (NBFIs) in the financial system has heightened concerns about their potential role in cross-border spillovers.

For example, in recent years, liquidity shocks have been transmitted across countries more frequently and intensely (Eren and Wooldridge (2021)). The CGFS’s 2021 report on capital flows concluded that the rising importance of NBFIs alters rather than reduces the risks associated with capital inflows to emerging market economies (EMEs); they expose EMEs to “old risks in new clothes” (CGFS (2021)). The current environment of monetary tightening puts NBFIs’ potential role in cross-border spillovers firmly in the spotlight.

Although the growing presence of NBFIs can impact a country’s exposure to cross-border spillovers, it also brings clear benefits ranging from a more diversified investor base to greater risk-sharing and a more efficient allocation of capital. The spillovers arising from NBFIs’ activities can be significant depending on country characteristics, yet experience shows that they can be mitigated with the help of policy tools, particularly macroprudential measures, occasional foreign exchange intervention and liquidity provision mechanisms (CGFS (2021)).

This paper summarises the role of NBFIs in cross-border spillovers. It first presents stylised facts about NBFIs’ cross-border activities, where NBFIs are defined as all types of financial intermediary other than banks. The paper then outlines six potential channels for spillovers from their activities, ranging from NBFIs’ dollar positions to currency and liquidity mismatches on their balance sheets, their use of leverage and herding. The final section examines whether NBFIs act more procyclically than banks. As policy responses are assessed in complementary work, they are not further discussed here.