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One of the risks is the likelihood of credit losses. The sector’s larger size means its troubles could, on their own, destabilize the entire financial system but they could also spread to traditional banks through real and perceived interconnections. Some of the risks that non-banks run increase when interest rates are rising, as they are now. Shadow banks now make up about 14% of the world’s financial assets and, like many non-banks, operate without the same level of regulatory oversight and transparency as banks. It is this type of institution that is worrying the investors polled by Bank of America. Non-banks that provide credit are known as “shadow banks,” although the term is often used imprecisely to mean all non-banks. Meanwhile, as regulators placed more restrictions on bank lending, certain types of borrowers, such as riskier consumers, increasingly sought out non-banks for finance. The sector has grown strongly since the global financial crisis in 2008, with its asset base expanding by 7% a year on average, according to FSB data.Īs interest rates hit rock-bottom in the years that followed the crisis, many savers and investors turned to non-banks in search of higher returns. According to the Financial Stability Board (FSB), a body of global regulators and government officials, non-banks had about $239 trillion on their books in 2021, accounting for just under half of the world’s total financial assets. It’s a diverse cast list: non-banks range from pension funds and insurers, to mutual funds and high-risk hedge funds.Īnd the sector is big. The term encompasses financial firms, other than banks, that provide all manner of financial services, including lending to households and businesses. The Bank of England called attention to the same issue last month.Īnd global investors surveyed by Bank of America in the middle of the recent banking crisis pointed to a group of US non-banks - rather than traditional lenders such as the newly defunct Silicon Valley Bank - as the most likely source of a credit crisis.īut what exactly are non-banks and how risky are they? The International Monetary Fund warned this week of “vulnerabilities” among so-called non-bank financial institutions, saying global financial stability could hinge on their resilience.
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