Global Monitoring Report on Non-Bank Financial Intermediation 2020

16 December 2020 | PDF full text (5 MB)

The COVID-19 shock highlights the importance of monitoring developments in the non-bank financial intermediation sector from a financial stability perspective.

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.

exhibit-0-1
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.

1-1LHS
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.

1-3LHS
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:

3-2LHS
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. [←]

FSB reports on global trends and risks in non-bank financial intermediation

Press enquiries:
+41 61 280 8486
[email protected]
Ref no: 55/2020

The Financial Stability Board (FSB) today published the Global Monitoring Report on Non-Bank Financial Intermediation 2020. The report presents the results of the FSB’s annual monitoring exercise to assess global trends and risks in non-bank financial intermediation (NBFI). The report covers data from 29 jurisdictions, representing over 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 involve regulatory arbitrage (the so-called narrow measure of NBFI). While the majority of this report is based on end-2019 data and therefore predates the COVID-19 pandemic, the trends described contribute to an understanding of the backdrop and some of the vulnerabilities that became apparent during the March market turmoil. In addition, two case studies are included in the report that analyse the impact of the COVID-19 shock on the NBFI sector in general and on money market funds specifically.

Main findings from this monitoring exercise include:

  • In 2019 the growth of the NBFI sector again outpaced that of banks. At a global level, the NBFI sector grew by 8.9% in 2019 to $200.2 trillion to account for 49.5% of total global financial assets, driven mainly by increases in investment funds, pension funds and insurance corporations. In over one third of the reporting jurisdictions, the NBFI sector represented more than 50% of the financial system.

  • The 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%. It now represents 14.2% of total global financial assets. This growth was driven mainly by collective investment vehicles with features that make them susceptible to runs, which grew by 13.5% in 2019, increasing their share to 72.9% of the narrow measure.

Klaas Knot, Vice Chair of the FSB and Chair of the Standing Committee on Vulnerabilities Assessment, said “The annual monitoring exercise furthers our understanding of vulnerabilities within the NBFI sector. The FSB will take steps to strengthen this monitoring as part of our ambitious work programme to strengthen the resilience of non-bank financial intermediation.”

Notes to editors

The FSB created a system-wide monitoring framework to track developments in NBFI in response to a G20 Leaders’ request at the Seoul Summit in 2010. The objective of the monitoring exercise is to identify the build-up of systemic risks in NBFI and initiate corrective actions where necessary. Complementing this monitoring, the FSB has been coordinating and contributing to the development of policies to mitigate potential systemic risks associated with NBFI.

The FSB’s holistic review of the March market turmoil, sets out an NBFI work programme, focusing on three main areas: work to examine and address specific risk factors and markets that contributed to amplification of the March 2020 shock; enhancing understanding of systemic risks in NBFI and the financial system as a whole, including interactions between banks and non-banks and cross-border spill-overs; and assessing policies to address systemic risks in NBFI. As part of that work, the FSB will identify ways to enhance its annual monitoring exercise (e.g. on data gaps and risk metrics).

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

Underlying data for graphs

Reporting templates

Monitoring Dataset

FSB Continuity of access to FMIs for firms in resolution: Informal summary of outreach and Q&A

9 December 2020 | PDF full text (171 KB)

FSB responds to questions posed by external stakeholders on the questionnaire for gathering information about continuity of access to FMIs for firms in resolution

On 14 August 2020, the FSB published a common template for gathering information about continuity of access to financial market infrastructures (FMIs) for firms in resolution. The template takes the form of a questionnaire that all FMIs are encouraged to complete. The responses to the questionnaire should be published or made available to firms that use the FMI services and their resolution authorities in other ways to inform their resolution planning.

On 23 September 2020, the FSB Secretariat, together with representatives of the official sector and industry, organised a virtual outreach meeting to explain the questionnaire to stakeholders and answer their questions.

This note provides an informal summary of the outreach meeting and responses to the questions posed by external stakeholders.

FSB Americas group discusses financial market developments and enhancing cross-border payments

8 December 2020

Press enquiries:
+41 61 280 8486
[email protected]
Ref no: 54/2020

The Financial Stability Board (FSB) Regional Consultative Group (RCG) for the Americas held a virtual meeting today to discuss global and regional macroeconomic and financial market developments. Members also exchanged views on spillovers from the policy responses to the March market turmoil and COVID-19 pandemic, and reiterated the importance of international cooperation to evaluate and coordinate the policy responses, including considerations for their future unwinding, once appropriate.

The group received an update on the FSB’s work programme, including planned deliverables to the Italian G20 Presidency. Key FSB deliverables next year include work on strengthening the resilience of non-bank financial intermediation, implementation of the roadmap to enhance cross-border payments, transition away from LIBOR, adequacy of central clearing financial resources for resolution and climate-related disclosures. RCG members explored ways to contribute to the workplan, in particular to the FSB’s roadmap on enhancing cross-border payments. The roadmap, which consists of 19 building blocks, provides a high-level plan, to make cross-border payments faster, cheaper, more transparent, and more inclusive.

The FSB workplan for next year will be published by January 2021.

Notes to editors

The FSB RCG for the Americas is co-chaired by Alejandro Díaz de León-Carrillo, Governor, Bank of Mexico and Cindy Scotland, Managing Director, Cayman Islands Monetary Authority. Membership includes financial authorities from Argentina, Bahamas, Barbados, Bermuda, Bolivia, Brazil, British Virgin Islands, Canada, Cayman Islands, Chile, Colombia, Costa Rica, Guatemala, Honduras, Jamaica, Mexico, Panama, Paraguay, Peru, Trinidad and Tobago, the United States of America and Uruguay.

The FSB has six Regional Consultative Groups, established under the FSB Charter, to bring together financial authorities from FSB member and non-member countries to exchange views on vulnerabilities affecting financial systems and on initiatives to promote financial stability1. Typically, each Regional Consultative Group meets twice each year.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman, US Federal Reserve Board; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

  1. The FSB Regional Consultative Groups cover the following regions: Americas, Asia, Commonwealth of Independent States, Europe, Middle East and North Africa, and sub-Saharan Africa. [←]

Supplemental note to External audits of banks – audit of expected credit loss

7 December 2020

View the Standard

The BCBS has issued this supplemental note to the Committee’s 2014 guidance, External audits of banks (2014 guidance) to contribute to the high-quality audit of banks. This note deals with the audit of the expected credit loss (ECL) accounting estimate within the overall financial statement audit. ECL frameworks bring significant change for banks and their external auditors. High-quality implementation and ongoing application requires considerable effort from all involved parties – management, audit committees and external auditors.

This supplemental note will help banks’ audit committees in their role of overseeing banks’ external audits (including the audit work on ECL), which is one of their key responsibilities. The note sets out the Committee’s expectations for the external auditor, alongside questions that an audit committee may ask the external auditor, and also elaborates on those expectations in the context of key components of ECL.

FSB Sub-Saharan Africa group discusses regional vulnerabilities and enhancing cross-border payments

3 December 2020

Press enquiries:
+41 61 280 8486
[email protected]
Ref no: 53/2020

The Financial Stability Board (FSB) Regional Consultative Group (RCG) for Sub-Saharan Africa held a virtual meeting today to discuss recent macroeconomic and financial market developments, including medium- and long-term implications to regional financial stability arising from the COVID‑19 pandemic. Members reiterated the importance of international cooperation to evaluate and coordinate the policy responses to COVID-19, including their future unwinding.

The Group discussed the findings of the FSB reports published around the G20 Riyadh Summit, including the holistic review of the March market turmoil; implementation of financial benchmark reforms; climate-related financial stability risks; and the roadmap to enhance cross-border payments (Roadmap), including addressing regulatory and supervisory issues with respect to ‘global stablecoins’. Members in particular considered ways they could contribute to meeting the overall Roadmap goals. They explored types of capacity building that may be useful to help address challenges to implementing the roadmap.

Members were also briefed on the FSB’s workplan for 2021, including the FSB’s deliverables to the Italian G20 Presidency. The FSB workplan for next year will be published by January 2021.

Notes to editors

The FSB RCG for Sub-Saharan Africa is co-chaired by Lesetja Kganyago, Governor, South African Reserve Bank and Ernest Addison, Governor, Bank of Ghana. Membership includes financial authorities from Angola, Botswana, Ghana, Kenya, Mauritius, Namibia, Nigeria, South Africa, Tanzania, Uganda and Zambia as well as the Central Bank of West African States (BCEAO) and the Bank of Central African States (BEAC). Permanent observers include the Committee of Central Bank Governors of the Southern African Development Community, and the East African Community.

The FSB has six Regional Consultative Groups, established under the FSB Charter, to bring together financial authorities from FSB member and non-member countries to exchange views on vulnerabilities affecting financial systems and on initiatives to promote financial stability.1 Typically, each Regional Consultative Group meets twice each year.

The FSB coordinates at the international level the work of national financial authorities and international standard-setting bodies and develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups.

The FSB is chaired by Randal K. Quarles, Vice Chairman, US Federal Reserve; its Vice Chair is Klaas Knot, President of De Nederlandsche Bank. The FSB Secretariat is located in Basel, Switzerland, and hosted by the Bank for International Settlements.

  1. The FSB Regional Consultative Groups cover the following regions: Americas, Asia, Commonwealth of Independent States, Europe, Middle East and North Africa, and sub-Saharan Africa. [←]

IIF Webinar: Dietrich Domanski

1 December 2020

FSB Secretary General Dietrich Domanski speaks with the Institute of International Finance about the FSB’s recent reports sent to the G20, as well as recent FSB findings and recommendations on a wide range of issues including COVID-19 policy coordination, LIBOR reform, climate-related risks, ‘global stablecoins’, BigTech in EMDEs and outsourcing and third-party dependencies.