FSB published a report that presents results of the annual monitoring exercise to assess global trends and risks in non-bank financial intermediation, also called NBFI. The monitoring exercise takes a comprehensive look at non-bank financial intermediation to examine the cross-border linkages and interconnectedness between different types of non-bank financial entities and banks. Focus is also on parts of non-bank financial intermediation that may pose bank-like financial stability risks and/or involve regulatory arbitrage. The exercise covers pre-COVID data as of the end of 2019, from 29 jurisdictions. The results of the monitoring exercise show that the non-bank financial intermediation sector grew faster than banks over the past decade, including in 2019.
The following are the additional key findings of the monitoring exercise:
- The financial assets of the non-bank financial intermediation sector—comprising mainly pension funds, insurance corporations, and other financial intermediaries—accounted for 49.5% of the global financial system in 2019, compared to 42% in 2008. Moreover, the relative size of non-bank financial intermediation in emerging market economies has increased at a faster pace than in advanced economies. Loan provision by non-bank entities dependent on short-term funding has increased significantly faster in emerging market economies than in advanced economies.
- Expansion of collective investment vehicles such as hedge funds, money market funds, and other investment funds was one of the key growth drivers of non-bank financial intermediation. The assets of this diverse range of entities grew at an annual average rate of 11% between 2013 and 2019, to make up 31% of the non-bank financial intermediation sector, reflecting both sizable inflows and valuation gains.
- The pattern of linkages between banks and other investment funds has changed since the 2008 financial crisis. One example of changing linkages is the increasing use of repo transactions as a source of funding, particularly in the Americas.
- The narrow measure of non-bank financial intermediation grew by 11.1% to USD 57.1 trillion in 2019 and now represents 14.2% of total global financial assets. This growth was driven mainly by collective investment vehicles with features that make them susceptible to runs. The narrow measure includes elements such as collective investment vehicles; loan provisions that are typically dependent on short-term funding; intermediation of market activities dependent on short-term funding, insurance, or guarantees of financial products; and securitization-based credit intermediation.
The report also includes two case studies that analyze the impact of the COVID-19 shock on the non-bank financial intermediation sector in general and on money market funds specifically. In March 2020, as key funding markets experienced acute stress and demand for liquidity increased, some collective investment vehicles within the narrow measure experienced large outflows. There was a surge in redemptions from some non-government money market funds. Some fixed income funds also saw large redemptions, particularly those that offer daily redemptions and invest in less liquid assets. Based on the additional quarterly data collected up to the second quarter of 2020 for the COVID-19 case study, credit intermediation as well as maturity and liquidity transformation of fixed income funds generally decreased in the first quarter of 2020 before increasing again in the second quarter following official sector support measures. The March 2020 market turmoil has underlined the importance of the annual system-wide monitoring of non-bank financial intermediation developments carried out in this exercise
Keywords: International, Banking, Insurance, Securities, NBFI, Non-Bank Financial Intermediation, COVID-19, FSB
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