Navigating the European Landscape: Assessing the Significance and Variations of Non-Bank Financial Institutions

Relative to the banking sector, NBFIs remain less important: The European Central Bank noted that the sector had reached about 80% of the size of the banking sector in the eurozone in 2022. This is significant but remains much smaller when considering the size of the sector globally.

 

In both geographies, the sector has developed significantly after taking a hit during the global financial crisis, benefiting from the stricter regulations on banks and the search for higher returns. In its 2023 financial stability report, the IMF highlighted that the previous low interest rate environment had prompted NBFIs to shift their investments to riskier assets in the hope of finding higher returns. But with rising yields and a worsening outlook for credit risk, NBFIs have started to sell their riskier assets. With this development comes recent concerns over increasing NBFI vulnerabilities.

 

The share of both banks and non-banks in relation to total domestic financial assets differs significantly between countries.

 

Luxemburg, Ireland and the Netherlands have very important NBFI sectors, the first two because they host many investment funds as the latter has a large pension fund sector. On the other hand, in France and Spain, total domestic financial assets remain mostly dominated by traditional banks. Variations in the NBFI sector size and type between Europe and the rest of the world, and also between European countries, indicate that Europe not equally exposed to the NBFI sector’s vulnerabilities.

 

NBFI share of total domestic financial assets varies significantly between countries

In Europe, the share of NBFIs of total domestic financial assets is the highest in Luxemburg

 

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