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In its latest report, the International Monetary Fund estimates that the non-banking financial sector is more exposed to monetary tightening than banks, which are subject to very strict regulations.
The non-banking financial sector – which includes insurance companies, pension funds and investment funds – poses an increased risk to the financial sector due to their exposure to the consequences of the ongoing monetary tightening, the International Monetary Fund (IMF) estimated on Tuesday. ) in a report. According to the analytical chapter of the GFSR, a report devoted to global finance published by the institution every six months, the vulnerability of non-bank financial institutions (or NBFIs) has increased over the past decade, as they have increased in importance, to the point of now posing a risk for the whole sector, at a time when central banks are raising their rates.
Through this action, the central banks hope in particular to reduce the credit available, by increasing its cost, which should make it possible to reduce investment and therefore, ultimately, activity, so as to bring down inflation. But this rise in interest rates also directly affects the activity of the NBFIs, which often own a large part of the debt issued by the States and which find themselves reselling it with difficulty on the secondary market. The latest issues indeed offer much better returns over the long term than the issues made in recent years.
Furthermore, these establishments are not subject to regulations as strict as those applied to banks under the Basel III agreements, and soon Basel IV, particularly in terms of available liquidity and risk exposure, whereas the NBFIs now represent more than half of the financial sector.
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Strengthen regulation
The IMF has identified three possible sources of risk for the financial sector, in particular the interconnection of NBFI with the banks, which increases the risk of transferring difficulties from one to the other and thus limits, at the end of the chain, the capacities of financing of the real economy, at the risk of slowing it down too much.
The other two sources of concern are specific to the very functioning of NBFIs, with for example a liquidity inadequacy, which would force them to sell assets in order to finance the returns promised to customers, with the risk of incurring higher anticipated losses. This is a situation that notably accelerated the bankruptcy of the Silicon Valley Bank (SVB).
Finally, the IMF sees an increased risk of the need for borrowing, which could increase the cost of the latter while interest rates have risen sharply both in the United States and in Europe, with the monetary tightening policy of the European Central Bank (ECB) than the Federal Reserve (Fed) for about a year. In order to limit the risks identified, the Fund therefore proposes that the authorities strengthen the regulations relating to NBFIs, in particular by bringing them closer to those applied to banks.
Last October, the sharp rise in the UK’s 10-year debt rates, caused by the political crisis following the presentation of the mini-budget by the former Chancellor of the Exchequer, Kwasi Kwarteng, had greatly destabilized the funds British pensions. This had forced the Bank of England to react to maintain financial stability.