The European Central Bank (ECB) has highlighted notable security vulnerabilities within portions of the non-banking financial sector, including investment and pension funds as well as insurers. It urges strengthening asset resilience from a macroprudential vantage point and recommends subjecting these assets to liquidity stress testing as a core preventive measure.
The ECB’s Financial Stability Report, under the leadership of its president and with the guidance of deputy governor Luis de Guindos, notes that non-banking financial institutions should face appropriate stress tests to gauge liquidity risk amid margin and guarantee calls during adverse scenarios. These tests aim to provide a clearer view of how such entities would fare when stress peaks and markets tighten.
To that end, the ECB advocates the development of clear guidelines, best practices, and recommendations for conducting these stress tests. It emphasizes that authorities must have a mandate to monitor results and to request remedial actions from audited organizations when needed.
In measuring liquidity needs, both at the entity level and across the system, authorities and firms will be better positioned to assess the ability to meet margin and collateral requirements during periods of stress. This approach is intended to improve data quality at the organizational level, act as a disciplinary mechanism, and bolster risk management and emergency planning functions. The results can also be used to calibrate other measures, such as preserving adequate liquidity reserves and diversifying liquidity sources.
According to the ECB, key aspects to consider for increasing sector resilience include setting leverage limits specific to different non-banking entities or employing discretionary restrictions for entities exposed to similar risk profiles. It notes that calibrating these limits requires assessing appropriate leverage levels in light of each entity’s business model, the economic benefits of leverage, and the externalities leverage imposes on the financial system. The statement adds that stress tests may be informative in this regard.
However, the agency recognizes that stress testing can be resource-intensive and stresses the importance of applying proportionality when designing any evaluation framework to avoid overreach or unnecessary burden.
Other measures
With the growing role of the non-bank financial intermediation sector in financing the real economy, there are strong interconnections with the banking system. The central bank stresses the need to address vulnerabilities in this sector in order to support financial stability and the conduct of monetary policy.
Beyond stress testing, the ECB proposes requirements for institutions in the non-banking financial sector to develop robust emergency plans and governance practices to manage liquidity risks arising from margin calls or collateral. Strengthening collateral management and securing reliable credit lines are part of this approach, enabling authorities to verify contingency plans and fine-tune liquidity measures accordingly.
Advances in this area are expected to help organizations better assess and manage liquidity risks that stem from margin calls and guarantees. The ECB is committed to ensuring that firms in this sector hold sufficient levels of high-quality liquid assets or cash reserves to improve their ability to meet large guarantees and margins, thereby supporting the durability of the broader financial system.
On the other hand, the ECB recommends diversification of liquidity sources—across asset classes and within each organization—while avoiding excessive concentration in a single type of guarantee or a single counterparty for financing and credit lines. Promoting diverse funding sources is seen as a key resilience contributor, reducing vulnerability to generalized liquidity shocks.
Diversifying liquidity sources is viewed as a practical way to strengthen organizational resilience when facing widespread liquidity stress, ensuring that non-banking financial entities can weather funding disruptions with greater steadiness. The overarching message is clear: a broader, more resilient funding structure reduces systemic risk and supports stability across the financial ecosystem. [ECB Financial Stability Report, attribution]