Basel highlights four key risks from growth of non-bank firms

The Basel Committee on Banking Supervision published on Thursday a paper entitled ‘Banks’ interconnections with non-bank financial intermediaries (NBFIs)’, the latest move by a regulator to focus on this increasingly important sector.

The banking watchdog said the failure of non-bank firms to meet their obligations or provide services to banks could have “severe repercussions for financial stability by affecting banks’ solvency, liquidity, funding and ability to provide financial services to customers”.

The paper identifies four key areas of concern: distress among NBFIs could force banks to increase margin, adding to market stress; NBFIs could spread stress to a bank-owned parent; banks reliant on risk transfers with NBFIs could be affected if the non-bank withdraws that support; and banks dependent on NBFI funding could similarly be affected.

The Basel Committee described NBFIs as “a broad range of entities such as investment funds, insurance companies, pension funds and other financial intermediaries, some of which may be owned by banks”.

The paper suggested NBFIs have grown more quickly in the US than in other major markets, and now account for nearly three-quarters of US financial assets.

The Basel Committee concluded by suggesting that national regulators may not have the right data to understand fully the risks associated with non-bank firms.

The paper said in summary: “Granular, timely, high-frequency data are essential to understand and monitor bank-NBFI linkages, but supervisors may not have access to the data they would need to comprehensively map these linkages. Potential improvements for supervisory data include increasing granularity and frequency.”

The Basel Committee’s is the latest move to highlight the growing importance of non-bank firms.

The Financial Stability Board (FSB) said last month it will focus on government debt in the global standards body’s work on the NBFI sector.

Trade body the International Swaps and Derivatives Association said in March the FSB needs to do more analysis before finalising guidelines on non-bank leverage.