The exacerbated growth, in recent years, of “non-banking entities is proving to be a new risk to global financial stability”, warns the International Monetary Fund (IMF) in a study published this Tuesday, as part of the institution’s annual meetings, in Washington.
The IMF specifically states that there are serious vulnerabilities in the financial system “that could be amplified by the growth of non-bank financial entities because of their growing importance as market makers, liquidity providers and intermediaries in private credit, real estate and cryptocurrency markets”.
According to the IMF, policymakers must act as soon as possible to try to regulate this non-banking market, which currently, as a whole, “holds around half of the world’s financial assets”.
In fact, the “non-banks” are already within the regulated banks. According to the Fund, “in the United States and the eurozone, many banks currently have non-bank exposures that exceed their Tier 1 capital ratios — a crucial buffer that allows a bank to absorb losses and remain stable in times of crisis.”
The IMF has a definition for this non-bank sector. “Non-bank financial institutions cover very different types of companies”, but, “generally speaking, the sector is made up of financial companies that offer credit, brokerage and investment services, but these do not accept deposits, nor do they have central bank accounts”.
This means that these companies are “not covered by safety nets like deposit insurance [fundo de garantia de depósitos] and liquidity assistance, to which banks have access” within a framework of compliance with prudential rules and sectoral regulation.
Taking into account that half of global assets are in this sector that runs parallel to banks, the IMF warns that authorities “must strengthen supervision of non-bank financial intermediaries, whose increasing interconnection with banks could exacerbate adverse shocks”.