The global financial crisis of 2008 froze the financial system. Banks pulled back credit, families tightened their belts and companies laid off workers. It was a frightening time for everyone and an extremely difficult moment for the financial services industry.
Today, the landscape of finance is quite different. Different types of investors and firms are providing businesses, consumers and governments with credit and liquidity. More than a billion more people have access to credit thanks largely to newer tech-based lenders. Families also have more options to finance purchases and to diversify retirement portfolios. Equity, fixed income, and derivatives markets have all seen strong growth.
But these developments have not been driven by banks. Instead, it is nonbank’ financial institutions that have stepped up, increasing their share of global credit and finance from 43% during the 2008 crisis to nearly 50% by 2023, our most recent data show.
Nonbank financial institutions encompass very different kinds of enterprises, and exact definitions vary. Broadly, the sector includes financial companies that provide credit, trading and investment services but don’t take deposits from the public or have accounts with the central bank. That means they aren’t covered by safety nets like deposit insurance and liquidity assistance, which banks have access to in exchange for comprehensive prudential regulations.
Governments have new lenders, enhancing liquidity and holding down rates:New nonbank buyers for bonds such as US Treasuries provide additional liquidity. This helps markets operate efficiently, which can help hold down the interest on national debt that taxpayers ultimately pay.
Mid-sized businesses have gained more access to funding, supporting economic activity, employment, and financial resilience: private credit funds can provide funding for businesses that may be too large or risky for banks to lend to but too small to issue their own bonds.
Many such funds are managed by private equity firms, which in turn get financing from banks and other nonbanks. These nonbanks, typically insurers, pension funds, sovereign wealth funds, and endowments, that provide funding to private credit funds tend to have lower leverage and funding that is more stable over longer terms compared to banks. So, they don’t have to pull funds back as quickly during times of stress, increasing the financial system’s resilience.
Investors of all sizes have more ways to diversify portfolios. Investment funds, and particularly passive investment vehicles, have expanded access to capital markets for individual investors. As returns on the safest assets dwindled, index funds rapidly increased their share of assets under management, from 19% in 2010 in the United States to 48% by 2023.
And nonbanks made new asset classes, including commercial real estate and precious metals, available to more investors.
More diverse assets can help all investors manage risk, although speculative assets have risks of their own. – International Monetary Fund (IMF)
Caption
The nonbank financial institutions are growing worldwide.
- Photo: IMF
