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Amid high interest rates, coupled with lower growth rates, any distress in non-bank financial institution (NBFI) sector globally could have spillover credit impact on many other sectors, said global credit rating agency Moody’s Investors Service.

"Some economies could be highly exposed to any pullback in lending if NBFIs provide a significant proportion of credit to the economy, such as in the US and the UK. That said, some specific sectors within emerging markets like China's property sector are also reliant on non-bank funding," said Michael Taylor, a Moody's Managing Director.

Moreover, NBFI stress can rapidly spread to other financial institutions, weighing on funding conditions and potentially leading to mark-to-market losses at other financial institutions.

“In pockets where regulatory oversight and transparency are low, it can be difficult for policymakers to anticipate and quickly stem NBFI financial stress that damages market confidence and tightens liquidity,” Moody’s said.

According to Moody’s, the implications for sovereigns, corporates, banks and structured finance transactions will vary depending on their sector or regional exposure to NBFIs.

NBFIs with high leverage, less liquidity and weak risk management are most vulnerable to stress from higher rates. Those that have adopted leverage-driven investment strategies, as well as those that invested heavily in less liquid assets when funding was inexpensive and abundant, will face difficulties generating returns amid higher rates.

Open-ended funds account for a large part of them.

And financial stress can escalate quickly for some open-ended funds when declining asset values or weaker portfolio performance lead to redemption runs or margin calls.