Peter Eisenhardt (Feb 25)
BTRM Faculty Opinion
Non-Bank Financial Intermediation: Under the Microscope – Peter Eisenhardt, BTRM Faculty
In his Letter to Shareholders in 2021, J.P. Morgan CEO Jamie Dimon made clear that banks now play a diminishing role in the financial system due to the steady growth of Non-Bank Financial Intermediation (NBFI), formerly known as “Shadow Banking”.1 The sector includes fintechs, investment funds, insurance companies, pension funds, and large technologies companies. Dimon believes that post-GFC regulation is uneven and often disadvantages traditional banks relative to these competitors.
Regulators are well aware of the risks in NBFI sector, and while appreciating the benefits of innovation and alternative it brings. The Financial Stability Board (FSB) – an international body based in Basel that promotes financial stability by coordinating national financial authorities and international standard-setting bodies – leads much of the coordination, analysis, and monitoring. The FSB is concerned that “the non-bank financing may become a source of systemic risk if it involves maturity/liquidity transformation or leads to the build-up of leverage.”
In July 2024, the FSB published Enhancing the Resilience of Non-Bank Financial Intermediation: Progress report, which sets out progress over the past year and the FSB’s work programme to enhance the resilience of the sector.
In December 2024, the FSB) published its annual Global Monitoring Report on Non-Bank Financial Intermediation. A key finding of the monitoring exercise is that the NBFI sector “grew 8.5%, more than double the pace of banking sector growth (3.3%), raising the NBFI share of total global financial assets to almost 50% (roughly $250 trillion). This growth was largely attributed to higher asset valuations. Investor inflows to NBFI entities also contributed to the increase.” However, “most vulnerability metrics of NBFI entities – measuring credit intermediation, maturity transformation, liquidity transformation, and leverage – remained stable. Metrics for liquidity transformation in fixed income and mixed funds, as well as for leverage in finance companies, broker-dealers and SFVs, were relatively high.”
Also in December 2024, the FSB published Leverage in Non-Bank Financial Intermediation – Consultation Report. The report includes proposed policy recommendations “seek(ing) to address financial stability risks arising from leverage in NBFI, through improved risk identification and monitoring, a combination of policy measures, and enhanced cross-border collaboration.”
The FSB is inviting comments on the report via this secure online form by 28 February 2025.
All financial institutions should want to have their say to ensure regulation and policy that promotes financial stability, economic growth, efficiency, innovation, and fairness.
