Despite their differences, FIs generally do at least one:
- Pooling resources of small savers
- Safekeepng & accounting services, payment systems
- Providing liquidity by converting balance into means of payment
- Providing ways to diversify risks
- Reducing information costs
What do NBFIs have in common?
Market-based funding (as opposed to deposit-based)
Why do NBFIs pose less risk to the financial system than banks (in theory)?
Do not perform maturity / risk / asset transformation
What have the GFC & pandemic revealed about NBFIs?
They can amplify shocks, both directly & through linkages to other parts of financial system
Which has grown faster over the past decade – banks or NBFIs?
NBFIs
What % of the global financial system was NBFI AUM in 2008?
42%
What % of the global financial system was NBFI AUM in 2019?
49.5%
What does OFI stand for?
Other financial intermediaries
What are OFIs?
- Investment funds
- Captive financial institutions
- CCPs
- Broker-dealers
- Finance companies
- Trust companies
- Structured finance vehicles
What does CCP stand for?
Central counterparty
Where have NBFIs grown the fastest?
Emerging market economies
What are shadow banking entities?
A sub-sector of NBFIs with specific characteristics
What is the FSB’s definition of shadow banking?
Credit intermediation involving entities and activities fully or partially outside the regular banking system
What does FSB stand for?
Financial Stability Board
What factors increase systemic risk of shadow banking?
- Bank-like functions (transformation, leverage)
- Interconnectedness with regular banking
What is the trajectory of shadow banking to date?
- Dramatic growth in 00s
- Collapsed in GFC
- Grew to 28% of NBFI by 2019
How does shadow banking work?
- Securitisation-based credit intermediation
- Transformation across multiple balance sheets instead of one
What is securitisation?
Lenders sell loans, repackaged as ABSs, to other banks/investors
What are the steps of shadow banking?
- Banks/NBFIs/others originate loans
- Loan warehousing funded by ABCP
- Broker-dealers pool & structure loans into ABS/CDOs
- ABS warehousing funded by repos
What is ABCP?
Asset-backed commercial paper
What transformation does shadow banking perform?
Risky long-term loans -> apparently credit risk-free, short-term, money-like instruments
How is shadow banking funded?
Wholesale money market
What is the role of banks in shadow banking?
Originate loans, then transfer them to shadow banks
Why do shadow banks need banks?
Liquidity & credit support to get high credit ratings to buy money market instruments
