Stability concerns to watch in Non-Bank Financial Intermediation
Could the next financial crisis come from the non-bank sector? The structure of finance is changing, and with vast and increasing amounts of financial intermediation being done by entities other than banks, often less tightly regulated, this is an important area for monitoring, and disclosure efforts as well as potential regulation.
The Financial Stability Board (FSB) has published its ‘Global Monitoring Report on Non-Bank Financial Intermediation 2020’, its annual monitoring exercise to assess global trends and risks in non-bank financial intermediation (NBFI), focussing particularly on those aspects that may pose bank-like financial stability risks and/or regulatory arbitrage.
The NBFI sector has grown faster than banks over the past decade, including in 2019. The fastest growing groups are collective investment vehicles (CIVs) such as hedge funds, Money Market Funds and other investment funds as well as more traditional grouping such as pension and insurance funds. NBFI assets accounted for 49.5% of the global financial system in 2019, up from 42% in 2008, and it is growing fastest in emerging economies. As the report notes, “non-bank financial entities play an increasing role in providing financing to the real economy, as well as in managing the savings of households and corporates.”
While most of the report is based on end-2019 data, the trends it reveals highlight some of the stability concerns and vulnerabilities that came into sharp focus in the March 2020 market turmoil, which is also discussed. The shocks brought about by Covid-19 only serve to highlight the importance of greater monitoring around the NBFI sector.