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Knowledge gaps and how to monitor OFIs
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Trade depositories covering trading in a very wide range of products could help alleviate such
information gap for supervisory authorities. However, it is not clear whether such data would be
or should be made available to financial market participants and the public more generally.
In terms of individual institutions, we recommend to monitor closely the largest entities in each
sub-sector, provided such entities publish regularly balance sheet information. This
recommendation is based on Drehmann and Tarashev (2011) who note in their discussion of
simple indicators for monitoring systemic importance that “bank size is a reliable proxy of systemic
importance”. To that end, Annex 5 provides a list of the largest institutions in a number of OFI sub-
sectors. This information is sourced from a number of financial publications producing such lists
regularly.
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Conclusions
131
15
Conclusions
The financial crisis which started in 2007 has clearly shown that non-bank financial institutions
(NBFIs) played important and multi-faceted roles in the build-up and transmission of the financial
risk and financial distress. As result, policy-makers throughout the world aim to gain a better
understanding of the nature and role of the various non-bank financial institutions and their
potential impact on financial stability.
Part of the difficulty of assessing the impact of non-bank financial institutions on financial stability
is the wide range of institutions involved. The sector of non-bank financial institutions is defined as
including insurance undertakings, pension funds and other financial intermediaries (OFIs). The
latter group includes financial institutions engaged in the securitisation of assets, securities and
derivatives dealers (operating on own account) and specialised financial institutions (e.g., hedge
funds, venture capital firms, etc.).
In the EU27, at the end of 2011, the assets held by non-bank financial institutions stood at €32.6
tn., well above the €20.8 tn. held by monetary financial institutions (excluding central banks)
(MFIs). Among non-bank financial institutions, OFIs (such as asset managers, hedge funds, etc.)
accounted for slightly less than two-third of the total assets.
The MFI and NBFI sectors expanded at roughly the same pace from 2000 to 2004. From 2004 to
2006, in the run-up to the financial crisis, total assets held by the non-bank financial sector grew
much more rapidly than those held by the banking sector. During the crisis, the non-bank financial
sector experienced a much more pronounced decline in total assets than the banking sectors.
Finally, during the post crisis period of 2009 to 2011, growth of non-bank financial balance sheets
returned close to the growth experienced over the period 2002 to 2005 (before the sharp pre-
crisis acceleration), while assets of the banking sector have barely grown since 2008.
As a group, OFIs are much less leveraged than MFIs. At the end of 2011, the MFI’s leverage ratio
(defined as the ratio of loans and debt securities to shares and other equity) stood at 2.8 while it
was only 1 for OFIs.
The connectedness of the EU27 banking sector to the NBFIs sector increased sharply and this
increase occurred almost entirely during the financial crisis and post-crisis period.
The NBFIs did not dump any asset class on the market during the financial crisis. They reduced
their holdings of derivatives in 2009 and 2010 but in 2008 they had substantially increased their
holdings of derivatives.
The proposed framework for analysing risks to the financial stability of NBFIs is intended to
categorise a wide range of underlying and proximate causes and set out how these relate to a
common set of risks to financial stability and impacts on the financial system. The framework may
also be useful for policy development, analysis and tracking. For instance, in focusing on
underlying causes as opposed to proximate causes of financial instability.
The framework distinguishes between causes and proximate causes. Underlying causes relate to
the characteristics of individual non-bank financial sectors or connections between a non-bank
financial sector and banks/other non-bank financial sectors that bring about the build up of risks to
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