Navigating the Regulatory Landscape: Challenges and Progress in Regulating Non-Bank Financial Intermediaries
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A long road ahead towards more regulation
Major financial institutions such as the IMF and FSB and central banks are clearly aware of the NBFI vulnerabilities and intransparency. They have emphasized the need for regulation of NBFI activities and suggest for example, allowing certain NBFIs access to central bank liquidity in times of stress. Also they see a strong need to bridge the current data gaps and incentivise NBFIs to apply stricter risk management. The ECB has also recently requested banks to invest more effort into the regulation and monitoring of their NBFI counterparties, playing the ball back into the court of the banks. In any case, the implementation of such regulation on an international, growing, diverse and increasingly complex sector will take years.
The road ahead to a fully regulated industry is still very long. In the meantime, if the sector faces a severe stress which spills over to banks, monetary authorities might be forced to step in. Central banks remain the backstop and could – possibly reluctantly – have to lower the risk of an all-out financial crisis stemming from the growth of the Non-Bank Financial Intermediaries.
The irony
So, if the going gets tough for Non-Bank Financial Intermediaries, the banking sector could be affected by the shock wave.
After a decade of bank regulation that curtailed banks’ risk profiles and lowered the vulnerability of the banking sector, financial risks in other parts of the system have grown, posing an indirect risk to the banking sector and a possible reason for central banks to step in. It's an ironic situation, both for banks that have seen this sector grow much faster than the banking sector itself, as well as for regulators who were hoping to have dealt with financial stability. In trying to minimise risk, the risk has been significantly compounded.
FSB classification of narrow NBFI and respective share of global market (end of 2021)
List of countries included in the 21 + euro area group
