The Growing Risk of Spillovers and Spillbacks in the Bank‑NBFI Nexus
![Decorative image: View of high rise glass building and dark steel in London](https://libertystreeteconomics.newyorkfed.org/wp-content/uploads/sites/2/2024/06/LSE_NBFI_3_cetorelli_460.jpg?w=920)
Nonbank financial institutions (NBFIs) are growing, but banks support that growth via funding and liquidity insurance. The transformation of activities and risks from banks to a bank-NBFI nexus may have benefits in normal states of the world, as it may result in overall growth in (especially, credit) markets and widen access to a wide range of financial services, but the system may be disproportionately exposed to financial and economic instability when aggregate tail risk materializes. In this post, we consider the systemic implications of the observed build-up of bank-NBFI connections associated with the growth of NBFIs.
Banks and Nonbanks Are Not Separate, but Interwoven
![Decorative image: View of high rise glass building and dark steel in London](https://libertystreeteconomics.newyorkfed.org/wp-content/uploads/sites/2/2024/06/LSE_NBFI_2_cetorelli_460.jpg?w=920)
In our previous post, we documented the significant growth of nonbank financial institutions (NBFIs) over the past decade, but also argued for and showed evidence of NBFIs’ dependence on banks for funding and liquidity support. In this post, we explain that the observed growth of NBFIs reflects banks optimally changing their business models in response to factors such as regulation, rather than banks stepping away from lending and risky activities and being substituted by NBFIs. The enduring bank-NBFI nexus is best understood as an ever-evolving transformation of risks that were hitherto with banks but are now being repackaged between banks and NBFIs.
The New York Fed DSGE Model Forecast—June 2024
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This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since March 2024. As usual, we wish to remind our readers that the DSGE model forecast is not an official New York Fed forecast, but only an input to the Research staff’s overall forecasting process. For more information about the model and variables discussed here, see our DSGE model Q & A.