Banks and Non-Banking Financial Institutions: the Banking Perspective

The financial assets of NBFIs now surpass those of banks. Does this increase the risk within the financial system? Considering the financing needs for Europe’s sustainable and digital transition, as well as the organization of an independent European defense, is further growth in the system necessary?

What is the Role and Impact of Non-Bank Financial Institutions (NBFIs)?

Since the financial crisis, there has been a significant shift from the banking sector to NBFIs. In 2023, the total financial assets of NBFIs are estimated to be around EUR 43 trillion, whereas the banking sector's assets amount to EUR 38 trillion. This shift is driven by a variety of factors, including a prolonged low-interest environment, technological advancements, and stringent regulations imposed on banks after the financial crisis. One cannot derive from the figures whether this is a development to a riskier financial system; it is merely an observation. Quite the contrary, the question arises: do we even need more growth in the system? The answer is yes, if we want to meet the financing needs of the European sustainable and digital transition and to organize an independent European defence. For instance, the European Commission has estimated a financing need of EUR 600 billion per year just for the European transition.

Are NBFIs Competitors or Partners to Banks?

To some extend NBFIs compete nowadays with banks in certain areas such as lending or payments. However, they are mostly seen as partners. Banks are connected to NBFIs on both sides of the balance sheet, with intensive links in deposit-taking, credit relationships and as a provider of hedging services. We must not forget NBFIs are often part of larger banking groups, for instance banking groups with separate insurance or asset management subsidiaries. NBFIs enhance the availability of alternative financing sources and contribute to risk-sharing, which is crucial for the green and digital transformation. In the payments sector, NBFIs, particularly big tech companies, drive innovation across the entire financial sector.

Are NBFIs sufficiently Regulated and Supervised?

As a principle, regulation and supervision are essential to ensure fair competition and mitigate systemic risks. Although NBFIs do not face the same regulatory burden as banks, especially outside Europe, the current European framework for NBFIs so far has proven to be robust. For the time being, no further adjustments are required neither for NBFIs nor for banks. Instead, the effects of the recent review of the framework (AIF 2) have to observed and carefully analysed. Right now,it is too early to draw definitive conclusions. Still, the principle of "same business, same risk, same rules" always holds true and must apply to ensure a level playing field for similar financial market activities. Especially in the area of credit provision banks do follow high and tight standards which must not be undermined by competitors. To address the regulatory gap in between Europe and other parts of the world continuous cooperation among regulators and investment in data analysis are preferable in order to address potential sytemic risks..