The Global Monitoring Report on Non-Bank Financial Intermediation 2020 presents the results of its annual FSB monitoring exercise to assess global trends and risks in non-bank financial intermediation (NBFI), covering 29 jurisdictions that account for 80% of global GDP. The annual monitoring exercise focuses particularly on those parts of NBFI that may pose bank-like financial stability risks and/or regulatory arbitrage.

Size of monitoring aggregates and composition of the narrow measure At end-2019
Size of monitoring aggregates and composition of the narrow measure: 2010-2019

While the majority of this report is based on end-2019 data and therefore predates the COVID-pandemic, the trends described here contribute to an understanding of the backdrop and some of the vulnerabilities that became apparent during the March market turmoil. The impact of the COVID-19 shock on the NBFI sector in general and on money market funds (MMFs) specifically is analysed in two case studies. In addition, a comprehensive discussion of the March market turmoil and its policy implications are provided in the FSB’s holistic review of the March market turmoil.

The NBFI sector – comprising mainly pension funds, insurance corporations and other financial intermediaries (OFIs)1 – has grown faster than the banking sector over the past decade, including in 2019 (see Section 1). The financial assets of the NBFI sector amounted to $200.2 trillion in 2019, accounting for nearly half of the global financial system in 2019, up from 42% in 2008.

NBFI assets increased as a share of total financial assets in 2019, after a slight decrease in 2018: Total global financial assets
Total global financial assets: NBFI assets increased as a share of total financial assets in 2019, after a slight decrease in 2018

Key amongst the drivers of growth of NBFI was the expansion of collective investment vehicles (CIVs) such as hedge funds, MMFs and other investment funds (OIFs). The assets of this diverse range of entities grew by an annual average rate of 11% between 2013 and 2019 to make up 31% of the NBFI sector, reflecting both sizeable inflows and valuation gains.

The pattern of linkages between banks and OFIs has changed since the 2008 financial crisis (see Section 2). One example of changing linkages is the increasing use of repo transactions as a source of funding, particularly in the Americas. At end-2019, OFIs were – and had been for some time – net providers of cash to the financial system through reverse repo transactions. Another example is the cross-border linkages of OFIs, particularly in jurisdictions that serve as hubs for international capital flows. In aggregate, the cross-border links of OFIs are larger than those of banks, with the greatest extent of such links seen in the case of investment funds.

Other investment funds (OIFs)1, together with insurers and pension funds, were the main drivers of the high growth rate of NBFI assets in 2019: Contribution to NBFI sector growth
Contribution to NBFI sector growth: Other investment funds (OIFs), together with insurers and pension funds, were the main drivers of the high growth rate of NBFI assets in 2019

The parts of NBFI that may pose bank-like financial stability risks and/or involve regulatory arbitrage are measured by the so-called “narrow measure of NBFI”, which reflects an activity-based “economic function” (EF) assessment of risks (see Section 3). This assessment is conservative in its approach, reflecting the assumption that policy measures and/or risk management tools have not been exercised (i.e. on a pre-mitigant basis).

This narrow measure of NBFI grew by 11.1% to $57.1 trillion in 2019, at a faster pace than the 2013-18 average annual growth rate of 7.1%. As of end-2019, it represented 14.2% of total global financial assets.

The narrow measure includes the following elements:

Classification by economic function – EF1 remains the largest component of the narrow measure: Share of the narrow measure, per economic function
Share of the narrow measure, per economic function: EF1 remains the largest component of the narrow measure
  • A subset of CIVs – comprising mainly fixed-income funds, mixed funds and MMFs – are engaged in liquidity and maturity transformation and therefore have features that make them susceptible to runs. Such CIVs are classified within EF1 of the narrow measure, and grew by an average annual rate of 9.2% between 2013 and 2019, with a growth rate of 13.5% in 2019, increasing their share to 72.9% of the narrow measure.

  • Loan provision that is typically dependent on short-term funding (EF2) grew by 6.1% in 2019, representing 6.8% of the narrow measure. Finance companies, the entity type most commonly classified within EF2, had a somewhat elevated degree of leverage, but have moderate maturity transformation in most jurisdictions.

  • Intermediation of market activities dependent on short-term funding (EF3) grew by 5.4% in 2019, representing 8.2% of the narrow measure. Broker-dealers that are not prudentially consolidated into banking groups constitute the largest EF3 entity type. The leverage of these broker-dealers increased modestly in 2019, but in aggregate remains lower than the levels seen in the lead-up to the 2008 financial crisis.

  • Insurance or guarantees of financial products (EF4) grew by 16.6% in 2019 but still represent less than 1% of the narrow measure. While credit insurers remain the most common EF4 entity type, assets of investment funds involved in credit derivatives have increased in recent years, and accounted for the biggest share of EF4 assets in 2019.

  • Securitisation-based credit intermediation (EF5) increased by 2.5% in 2019, as increases in assets of SFVs, which include CLOs, offset a decrease in assets of Chinese trust companies. EF5 now accounts for 8.4% of the narrow measure. Assets of SFVs continued their growth trend since 2017, but remained below their pre-2008 levels.

In March 2020, as key funding markets experienced acute stress and demand for liquidity increased, some CIVs within the narrow measure experienced large outflows. There was a surge in redemptions from some non-government MMFs. Some fixed income funds also saw large redemptions, particularly those that offer daily redemptions and invest in less liquid assets. Based on the additional quarterly data collected up to Q2 2020 for the COVID-19 case study, credit intermediation as well as maturity and liquidity transformation of fixed income funds generally decreased in the first quarter of 2020 before increasing again in the second quarter following official sector support measures.

Datasets from the report are publicly available for use in accordance with the FSB’s normal terms and conditions.

  1. OFIs include all financial intermediaries that are not central banks, banks, public financial institutions, insurance corporations, pension funds or financial auxiliaries. They include mainly investment funds, captive financial institutions and money lenders, central counterparties, broker-dealers, finance companies, trust companies and structured finance vehicles. []