Published as part of the Financial Stability Review, May 2025.
Non-banks’ liquid asset holdings have continued to decline in recent years, impacting their capacity to absorb shocks. In particular, the share of cash equivalents and high-quality liquid asset (HQLA)[1] Level 1 holdings in both investment funds and insurance corporations have fallen substantially over the past four years (Chart A, panel a). These assets ensure that non-banks can meet their payment obligations in a timely manner, enabling them to absorb potential shocks and support euro area financial stability. This is especially important during stressed market conditions: if there are insufficient liquid asset holdings to meet sudden margin calls or redemptions, non-banks may have to sell illiquid assets at unfavourable terms. This could trigger financial contagion across different markets and amplify stress episodes.
Chart A
Investment shifts and valuation changes have made non-banks’ aggregate portfolios less liquid
a) Changes in liquid asset holdings over time | b) Breakdown of cumulative changes in cash and securities holdings |
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(Q1 2014-Q4 2024, percentages of total assets) | (Q1 2014-Q4 2024, € trillions) |
 |  |
Sources: ECB (CSDB, ICB, IVF, SHS) and ECB calculations.
Notes: Cash equivalents include deposits, currency, loan claims and money market fund shares. The levels of high-quality liquid assets (HQLA) are defined according to Commission Delegated Regulation (EU) 2015/61. Panel b: the cumulative valuation changes of asset classes may be defined as the variation in holdings that is not attributable to transactions.
The declining share of the most liquid assets in non-banks’ aggregate portfolios has been driven by changes in asset valuations and portfolio rebalancing towards non-HQLA assets. For investment funds, the drop in the share of cash and HQLA Level 1 holdings has been fuelled by relatively higher valuation gains on HQLA Level 2 equity holdings and growing investment in other non-HQLA assets. This has occurred alongside valuation losses on HQLA Level 1 bond holdings when interest rates started to rise in 2022 (Chart A, panel b). Insurance corporations have faced similar valuation effects, with valuation losses on Level 1 bonds playing a more significant role given their greater portfolio weight. Additionally, insurers have changed their long-term investment behaviour: a shift away from cash equivalents was accompanied by a higher allocation of investment fund shares, notably equity fund shares (Chart B, panel a), which also benefited significantly from valuation gains.
Aggregate HQLA holdings may overestimate the ability of non-banks to raise cash when they need it most, since not all assets remain equally liquid under stress. In particular, HQLA Level 2 holdings, which in the investment fund and insurance sector consist primarily of traded equities, can suffer sharp valuation losses during periods of market stress and it may only be possible to liquidate them at a significant discount. Haircuts inspired by HQLA regulation can be used to proxy liquidity availability in stressed periods. While the share of HQLA Level 2 holdings has increased directly for investment funds and indirectly for insurance corporations via equity fund shares, the share of readily available liquidity after applying these haircuts has continued to decline (Chart B, panel b).
Chart B
A larger share of equities may make it harder to liquidate assets during periods of market stress
a) Cumulative changes in insurance corporations’ holdings of investment fund shares, by fund investment policy | b) Changes in the broader measure of liquid assets holdings when applying haircuts |
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(Q1 2020-Q4 2024, € billions) | (Q1 2021-Q4 2024, percentages of total assets) |
 |  |
Sources: ECB (BSI, CSDB, ICB, IVF, SHS) and ECB calculations.
Notes: Panel a: “Other fund shares” includes holdings in hedge funds, real estate funds and other fund shares. Panel b: haircuts are applied based on Commission Delegated Regulation (EU) 2015/61 to proxy the liquidity of various types of instrument in periods of stress. Assets held via investment fund shares are obtained following the look-through approach outlined by Carvalho and Schmitz*. Total HQLA holdings without haircuts contain cash equivalents, HQLA Level 1 securities and HQLA Level 2 securities held both directly and via investment fund shares. Cash equivalents include deposits, currency, loan claims and money market fund shares.
*) Carvalho, D. and Schmitz, M., “Shifts in the portfolio holdings of euro area investors in the midst of COVID-19: looking-through investment funds”, Working Paper Series, No 2526, ECB, 2021.
Furthermore, access to liquidity held via investment fund shares may be uncertain in stress periods, which increases the risk of financial contagion between non-bank sectors. Although a greater portfolio allocation to investment fund shares may diversify liquidity sources, access to this liquidity depends on a fund’s ability to satisfy redemption requests. This liquidity risk transfer requires further monitoring as it can give rise to financial contagion, making it difficult to assess the risks in the financial sector from a systemic perspective.
HQLA levels are defined according to Commission Delegated Regulation (EU) 2015/61. This regulation defines HQLA Level 1 as the most liquid assets, including bonds issued by EU Member States and related authorities/entities or high-rated covered bonds with large issuances. HQLA Level 2 is further divided into Levels 2A and 2B. Level 2A generally includes various types of liquid bond that meet explicit liquidity criteria, while Level 2B also includes shares from major stock indices that meet specific stress conditions.