Non-Banks Are Larger Than Ever Before Getty

The Financial Stability Board (FSB) released its eighth annual global monitoring report on non-bank financial intermediation (NBFI). On 22 October 2018, the FSB announced its decision to change the term “shadow banking” with the term “non-bank financial intermediation” in its communications. With this terminology change, the FSB want to emphasize “the forward-looking aspect of the FSB’s work to enhance the resilience of non-bank financial intermediation and clarify the use of the technical terms.”

A key theme of the report was summarized by Klaas Knot, Chair of the FSB Standing Committee on Assessment of Vulnerabilities, “Non-banks play a growing role in the financial system, and their share of the financial system is the largest on record. They are becoming important players in areas where banks traditionally have played dominant roles.”

The assets of other financial intermediaries (OFIs), which includes all financial institutions that are not central banks, banks, insurance corporations, pension funds, public financial institutions or financial auxiliaries, grew by 7.6% to $116.6 trillion globally in 2017.

OFI assets grew faster than the assets of banks, insurance corporations and pension funds. OFI assets represent 30.5% of total global financial assets, the largest share OFIs have had on record.

“Non-bank financing is a valuable alternative to bank financing for many firms and households,” said Randal K. Quarles, FSB Chair “Of course, when it involves maturity or liquidity transformation, or leverage like banks, it may have effects on financial stability both directly and through its linkages with the banking system.

Importantly, Knot reminds market participants and regulators that “Authorities need to remain vigilant in addressing financial stability risks that emerge as a result of non-bank financing through enhanced data collection, improved risk analysis and implementing appropriate policy measures, including the FSB’s policy recommendations for addressing structural vulnerabilities from asset management activities.”

The FSB report includes data up to end-2017 from 29 jurisdictions, which represent over 80% of global Gross Domestic Product (GDP). As in previous years, this report compares the size and trends of financial sectors in aggregate and across jurisdictions based primarily on sectoral balance sheet data. The Report then focuses on those parts of NBFI that may pose bank-like financial stability risks, referred in the report to the “narrow measure.” According to Quarles, “The FSB’s monitoring exercise draws on the strength of the FSB’s broad-based and diverse membership to facilitate the sharing of information about these developments among authorities and helps to identify potential sources of financial stability risk. In this way, it contributes to harnessing the benefits of non-bank financing while containing associated risks.”

Other important conclusions of the FSB’s report are:

  • The monitoring universe…