The Transmission of Non-Banking Liquidity Shocks to the Banking Sector

The increasingly interdependence between non-banking financial institution (NBFIs) and the
banking sector conditions the provision of liquidity in the financial markets. This paper
evaluates how the market stress associated to the bankruptcy of one of the most interconnected
NBFIs in an emerging market economy affected the availability of unsecured interbank funding.
We show that the market stress conducted to a reallocation of deposits from money market
mutual funds (MMMF) within the banking sector that affected the liquidity provision in the
unsecured interbank market. Banks with ex-ante high concentration of deposits from the
MMMF sector significantly increased loan spreads and reduced the supply of unsecured funds
in the interbank market. Lending relationships and central bank liquidity contributed to
partially alleviate the liquidity shock. Overall, we identify that the concentration of uninsured
deposits from MMMFs increases the transmission of non-banking liquidity shocks to the
banking sector.