And such long chains can create additional points of vulnerability in the financial system. Nonbanks also increase the amount of maturity transformation conducted in the financial system without the stability-enhancing backstops offered to banks.
Although some nonbanks are eligible to obtain advances from the Federal Home Loan Bank System, nonbanks are not backed by federal deposit insurance, nor do they have direct access to a lender of last resort to stem runs on their short-term liabilities. As a result, their funding can dry up rapidly should counterparties begin to believe the nonbank is in financial distress.