The Financial Stability Board (FSB) today published the Global Monitoring Report on Non-Bank Financial Intermediation 2018. The report presents the results of the FSB’s eighth annual monitoring exercise that assesses global trends and risks from non-bank financial intermediation. It covers data up to end-2017 from 29 jurisdictions, which together represent over 80% of global GDP.
The annual monitoring exercise is part of the FSB’s strategy to enhance the resilience of non-bank financial intermediation. As in previous years, the exercise compares the size and trends of financial sectors in aggregate and across jurisdictions based primarily on sectoral balance sheet data. It focuses on those parts of non-bank financial intermediation that perform economic functions which may give rise to bank-like financial stability risks (i.e. the narrow measure of non-bank financial intermediation).
The main findings from the 2018 monitoring exercise include:
- The narrow measure of non-bank financial intermediation grew by 8.5% to $51.6 trillion in 2017, a slightly slower pace than from 2011-16. Since 2011, the Cayman Islands, China, Ireland and Luxembourg together have accounted for over two-thirds of the dollar value increase. The narrow measure represents 14% of total global financial assets.
- Collective investment vehicles (CIVs) with features that make them susceptible to runs continued to drive the overall growth of the narrow measure in 2017. They grew by 9.1%, a somewhat slower pace than during 2011-16. Together, CIV assets represent 71% of the narrow measure. They invest mostly in credit assets and are involved in liquidity transformation.
- Non-bank financial entities engaging in loan provision that is dependent on short-term funding grew by 6% in 2017, to account for 7% of the narrow measure. This category largely consists of finance companies, which employ a somewhat elevated degree of leverage and, in some jurisdictions, a high degree of maturity transformation. Finance companies in a few jurisdictions also displayed high liquidity risk.
- Market intermediaries that depend on short-term funding or secured funding of client assets grew by 5%, to make up 8% of the narrow measure. Broker-dealers constitute the largest entity type in this category. Reflecting their business models, broker-dealers in some jurisdictions continue to employ significant leverage, although it is considered to be lower than the level seen prior to the 2007-09 global financial crisis.
- Securitisation-based credit intermediation increased by 9% in 2017, to account for 10% of the narrow measure, primarily driven by growth in trust company assets and securitisations.
- In 2017, the wider “Other Financial Intermediaries” (OFIs) aggregate, 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 in 21 jurisdictions and the euro area, growing faster than the assets of banks, insurance corporations and pension funds. OFI assets represent 30.5% of the total global financial assets, the largest share on record. Among the OFI sub-sectors, structured finance vehicles grew in 2017 for the first time since the financial crisis.
- Investment funds and money market funds are the largest OFI sub-sectors that provide credit to banks. In aggregate, banks and OFIs have become marginally more interconnected through credit and funding relationships in 2017, remaining around 2003-06 levels.
Randal K. Quarles, FSB Chair, said: “Non-bank financing is a valuable alternative to bank financing for many firms and households. 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. 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.”
Klaas Knot, Chair of the FSB Standing Committee on Assessment of Vulnerabilities, said: “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. 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.”