Recently, the Congressional Research Service (CRS) released a report analyzing the growth, risks and regulatory considerations surrounding nonbank financial intermediation (NBFI), also known as “shadow banking.” The report noted NBFIs — including investment funds, broker-dealers and other capital markets participants — now hold more than two-and-a-half times the financial assets of U.S. banks, making them a significant component of the financial system.
The report identified several vulnerabilities in the NBFI sector, including high leverage levels, gaps in data and transparency, increased interconnectedness between NBFIs and traditional banks, concentrated risks among large market intermediaries, and liquidity mismatches in open-end funds. These vulnerabilities could increase the potential of “run-like” behavior that would transmit shocks to the broader financial system, as the report documented with the 2008 financial crisis and the market reaction to the COVID-19 pandemic.
The CRS outlined a range of policy options under consideration, including enhanced liquidity requirements, leverage limits, improved data collection and greater regulatory coordination. The report also discussed the evolving role of the Financial Stability Oversight Council (FSOC), which recently updated its guidance to streamline the process for designating a nonbank financial company as a systemically important financial institution (SIFI).
Finally, CRS examined ongoing debates about whether to apply prudential banking tools to NBFIs and the potential trade-offs of increased regulation. It emphasized the significance of the evolving relationship between banks and nonbanks as fundraising and risk activities shift across the financial sector.
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