VoxEU Column Financial Regulation and Banking

Non-bank financial intermediation: The case for a macroprudential framework

The policy framework developed so far on non-bank financial intermediation has been based mainly on microprudential tools, looking at individual institutions and activities. This column argues that the effectiveness of these tools could be strengthened if they are accompanied by a comprehensive framework to control systemic risk. This framework could be built around determining the correct pricing of backstops, resolving the trade-off between systemic risk and intermediation costs, mitigating the risk of runs on money market funds, resolving the agency problems in some non-bank financial intermediation transactions, and enhancing the stress test tools. 

In the last years, the global financial system has undergone structural changes that have affected the intermediation channels between savers and investors, the functioning of markets, and the configuration of systemic risks. Determinants for these changes include the evolution of the non-bank financial intermediation (NBFI), which today plays a key role in financing real economy, and in managing financial assets.1  

The financial assets of the NBFI have risen to 49.5% of the global financial system at the end of 2019, compared to 42% in 2008; at a global level in 2019 the rate of growth of NBFI (8.9%) has outpaced that of the banking sector (5.1%).2 This expansion has been mainly driven by collective investment vehicles, which include a variety of institutions (for example, hedge funds, money market funds, fixed income funds) engaged in activities involving significant liquidity and maturity transformations that may create bank-like risks to financial stability, whose assets have more than doubled in a decade. NBFI is likely to expand even more the years to come.3 

Credit risk is increasingly borne by investors and intermediated through financial markets. Financial stability tends to rely progressively more on markets’ ability to manage risks rather than on the capital position of individual banks. The shift of credit intermediation towards markets has made market liquidity an essential factor to ensure resilience, and has determined higher degrees of interconnectedness among financial sectors, through longer and more complex chains of intermediation. All these developments tend to alter the speed and diffusion of shocks across the global financial system (Visco 2013, Abad et al. 2017).

The March 2020 market turmoil 

In March 2020, the COVID-19 shock hit a financial system in which the NBFI sector has become increasingly central in financing higher and growing levels of debt accumulation on a global scale.4 While core parts of the financial system (banks and market infrastructures) were able to withstand the shock, certain pre-existing vulnerabilities may have amplified the reaction of financial markets, prompting public authorities to step-in with a wide range of measures.5 

Important funding markets were severely affected and the demand for liquidity increased, given that there were sustained redemption requests from non-government MMFs, particularly those that offer redemptions on a daily basis and invest in less liquid assets. The dislocation of prices from fundamentals was exacerbated by the difficulties faced by broker-dealers in absorbing large sales of assets, including in core government bond markets.

The March 2020 turmoil has highlighted how certain NBFI entities/activities can amplify shocks, both directly and through their interconnectedness with the other parts of the financial system. The major concerns stem from funds that do not adequately manage their liquidity positions and experience unexpected redemption requests from their investors. This can increase their susceptibility to runs during stress episodes, contributing to price dislocations and fire sale spirals, further propagating risks. 

The lessons from the global financial crisis

The collapse of NBFI during the global financial crisis (GFC) brought to the light the large amount of liquidity and credit tail risks hidden in the system. The originate-to-distribute model increased the links between intermediaries and capital markets, with important implications for financial stability. Even if a higher degree of interconnectedness improves risk diversification and markets’ resilience, a more interlinked financial system heightens the risk of contagion across the different segments of intermediation (Rajan 2005, Adrian and Jones 2018).

A key lesson from the GFC is that NBFI should be re-designed with less leverage, less risky assets and maturity transformations to be able to survive periods of stress in the future. The Financial Stability Board (FSB) has coordinated the development of policies to reduce systemic risk in the NBFI in the following key areas: mitigating risks in banks’ interactions with NBFI; reducing the susceptibility of MMFs to runs; improving transparency and aligning incentives in securitisation; dampening pro-cyclicality in securities financing transactions.6 Ten years later, it is to be recognised that the implementation of the NBFI reforms is at an earlier stage than other reforms (FSB 2020a, IMF 2018). 

The case for a macroprudential framework 

In the years after the GFC, persistently low and declining yields on fixed-income instruments have prompted institutional investors to seek higher returns by using leverage and investing in riskier and less liquid assets (IMF 2019). The low-yield environment may promote higher conformity in investment strategies among NBFI entities, exacerbating a structural trend driven by benchmarking and compensation, increasing herding behaviour and pro-cyclicality among asset managers. Increased degrees of similarity in portfolio decisions may amplify market sell-offs in the event of an adverse shock. NBFI activities show higher vulnerability (with respect to traditional banking) since they do not benefit from explicit official sector-driven backstops, while performing liquidity, maturity and credit transformations. 

The NBFI policy framework developed so far has been based mainly on microprudential tools. The focus of the NBFI regulation/supervision should not be only the stability of individual entities. Pro-cyclicality, herding behaviour and highly correlated assets could create the scope for bubbles and volatility (Pozsar et al. 2013, Adrian and Shin 2010). Regulators should pay much more attention to the effects on the financial system and the real economy of the collective actions of the NBFI entities/activities (i.e. adopting a macro-prudential perspective) (Signorini 2018, Lombardi and Siklos 2017). The effectiveness of micro-prudential tools could be strengthened if they are accompanied by a comprehensive framework to assess systemic risk, also including policy measures to address the market failures arising from NBFI. 

The main elements of a new framework 

A new NBFI policy framework could be built along the following building blocks (Trapanese 2021): 

1) Determining the correct pricing of backstops

Since the GFC, authorities have pursued two policy options for the calculation of an economically sound price of the backstops to keep NBFIs safe: 1) an increase of banks’ prudential requirements; 2) the definition of a wider scope of regulation to include NBFI entities. Ten years later, the first option is almost completed; at the same time, the second is lagging behind schedule. There is a need to enlarge the scope of the regulatory perimeter through measures calibrated to the specificities of the various NBFI entities, to be framed within an overall framework on systemic risk.

2) Resolving the trade-off between systemic risk and intermediation costs

Raising prudential requirements or enlarging the regulatory scope raise the cost of financial intermediation, lowering the potential for systemic risk in the event of a large shock. In doing so, these policies establish a potential trade-off between containing systemic risk and raising the cost of intermediation. On balance, the implied costs could be considered lower than the medium-term advantages: once the lower incidence of financial crises and the reduced potential for systemic risk are factored in, the benefits in terms of financial resilience and economic growth could be substantial when evaluated over a longer period.

3) Mitigating the risk of runs on MMFs

Among the regulatory areas where progress is most needed are MMFs, which were at the centre of the March 2020 turmoil (FSB 2020c).  One important strand of the post-GFC reforms has been aimed at reducing reliance on the constant net-asset-value model (C-NAV) and introducing a variable NAV (V-NAV). This is a particularly sensible policy option, because C-NAV portfolios induce investors to treat MMFs’ liabilities as equivalent to demand deposits. More progress is needed in reducing the reliance on the C-NAV and introducing a mandatory V-NAV. 

 4) Resolving the agency problems in some NBFI transactions

A greater attention should be given to the implementation of the internationally agreed rules on risk retention in securitisation. Such rules tend to impact the incentives of several actors, reducing moral hazard. It is key to ensure a common approach at the global level, limiting the scope for exemptions, specific treatments, and delays in implementation.

5) Enhancing stress test tools

There is a need to enhance the ability of regulators to assess the relative importance of the different transmission mechanisms, using more appropriately designed stress test tools. The most urgent analytical priorities include a better modelling of second-round effects, as well as of direct and indirect interlinkages between banks, insurance companies, pension and investment funds through common asset holdings and fire sales, and of the risks of international spillovers.7


The nature of the externalities associated to NBFI and the importance of markets (rather than single intermediaries) in the allocation of risks tend to reduce the effectiveness of micro-prudential measures. These tools could be reinforced by a framework containing policy measures to address systemic risks arising from NBFI. 

Risks tend to rise during periods of low interest rates like the current one, and those risks can migrate from one area to others. After more than ten years from the GFC, pressures for a rollback of the post-GFC reforms are materialising, motivated in part by the need to respond more effectively to the consequences of COVID-19. These tendencies should be resisted, since they could undermine the important progress made so far in improving financial stability.


Abad, J, M D’Errico, N Killeen, V Luz, T Peltonen, R Portes and T Urbano (2017), “Mapping the interconnectedness between EU banks and shadow banking entities”,, 25 April.

Adrian, T and H S Shin (2010), “The Changing Nature of Financial Intermediation and the Financial Crisis of 2007-2009”, Federal Reserve Bank of New York, Staff Report No 439. 

Adrian, T and B Jones (2018), “Shadow Banking and Market-Based Finance”, IMF Working Paper No. 14.

Claessens, S and L Ratnovski (2013), “What is shadow banking?”,, 23 August. h

CGFS – Committee on the Global Financial System (2018), “Structural Changes in Banking after the Crisis”, CGFS Papers No. 60.

FSB – Financial Stability Board (2013), “Strengthening Oversight and Regulation of Shadow Banking - Policy Framework for Strengthening Oversight and Regulation of Shadow banking Entities”.

FSB, (2020a), Implementation and Effects of the G-20 Financial Regulatory Reforms, Annual Report.

FSB, (2020b), “Holistic Review of the March Market Turmoil”.

FSB, (2020c), “Global Monitoring Report on Non-Bank Financial Intermediation 2020”.

Haldane A. G., (2014), “The Age of Asset Management?”, Speech at the London Business School.

Hodula, M (2020), “Off the radar: The rise of shadow banking in Europe”,

IMF (2018), Global Financial Stability Report, October.

IMF (2019), Global Financial Stability Report, October.

Lombardi, D and P Siklos (2017) “From the shadows into the light: progress on benchmarking macro-prudential policy strategies”,, 11 April.

Pozsar, Z, T Adrian, A Ashcraft and H Boesky (2013) “Shadow Banking”, Federal Reserve Bank of New York, Economic Policy Review.

Rajan, R (2005), “Has Financial Development Made the World Riskier?”, NBER Working Paper No. 11728. 

Signorini, L F (2018), “The Regulation of Non-Bank Finance: The Challenges Ahead”, Bank of Italy.

Trapanese, M. (2021), “The Economics of Non-bank Financial Intermediation: Why Do We Need to Fill the Regulation Gap?”, Bank of Italy, Occasional Papers Series No. 625.

Visco, I (2013), “The Financial Sector after the Crisis”, BIS Central Bankers’ Speeches.


1 See CGFS (2018) and FSB (2020b), which include as drivers for these changes other important factors, such as technological innovations, developments in the US dollar funding markets, and post-global financial crisis (GFC) market adjustments as well as prudential regulation reforms. See also Claessens and Ratnovski (2013).

2 At the end of 2019, the outstanding stocks of the assets of the NBFI amounted to $200,2 trillion, compared to $155,4 trillion for banks and $30,5 trillion for central banks, within a grand total of $404,1 trillion for the financial system as a whole on a global scale. See FSB (2020c) and Hodula (2020).

3 Haldane (2014) estimates that its assets under management could reach $400 trillion by 2050.

4 FSB (2020b) delivers a detailed analysis (and timeline) of the financial developments that occurred during the March 2020 market turmoil. 

5 Pre-existing financial vulnerabilities include: relatively easy financial conditions; higher debt accumulation; declining asset quality; stretched valuations in some asset classes; compressed risk premia; large amount of sovereign debt with negative yields; increasing search for higher returns; higher levels of leveraged loans (mainly via securitisation/collateralized loan obligations); greater reliance on dollar funding in EMEs. See FSB (2020b).

6 For the details of the FSB overall policy approach, see FSB (2013), FSB (2020c).

7 An essential pre-condition for a NBFI policy framework relates to the need for high-quality, internationally comparable and granular data, including on the links between intermediaries active on different markets.

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