New risks from nonbank financing

There is an interesting article published Sept. 29 on the IMF Blog, written by Mr. Jay Surti, that I wanted to highlight following Filipinos growing reliance on nonbank financing.

- MARIANNE GO

The article, titled "Explainer: Five Megatrends Shaping the Rise of Nonbank Finance," starts off with the observation that half of all financial assets worldwide are now held and intermediated by companies that are not classified and regulated.

The global financial crisis of 2008, he wrote, froze the financial system. Banks pulled back credit, families tightened their belts and companies laid off workers, leading to an extremely difficult moment for the financial services industry.

Today, he pointed out, the landscape of finance has changed, with different types of investors and firms providing businesses, consumers and governments with credit and liquidity.

More than a billion more people now have access to credit from new tech-based lenders. Families also have more options to finance purchases and to diversify retirement portfolios. Equity, fixed income and derivatives markets, he said, have all seen strong growth.

However, he noted, these developments have not been driven by banks, but by "nonbank" financial institutions that have stepped up, increasing their share of global credit and finance from 43 percent during the 2008 crisis to nearly 50 percent by 2023, based on recent data.

Half of all financial services worldwide, Mr. Surti wrote, are now offered by companies that are not classified and regulated as banks.

Nonbank financial institutions, he said, encompass very different kinds of enterprises, and exact definitions vary. Broadly, the sector includes financial companies that provide credit, trading and investment services, but do not take deposits from the public or have accounts with the central bank.

That means, they are not covered by safety nets like deposit insurance and liquidity assistance which banks have access to in exchange for comprehensive prudential regulations.