Non-Bank Financial Intermediation: The Reasons for a Systemic Risk Framework: Economic Mechanisms, Theoretical Models, Regulations

This book offers an analysis of the economics of non-bank financial intermediation (NBFI): the structure of markets, the economic incentives of the agents involved, and the institutional aspects characterizing this form of intermediation as compared with that performed by banks. The growing importance of NBFI in the supply of credit has increased the degree of interconnectedness among the different components of the financial sector (including banks), altering the potential speed and diffusion of shocks in the global financial system.

The policy framework developed so far has been based mainly on micro-prudential tools, looking at individual institutions and activities. I argue that the effectiveness of these tools could be strengthened only if they are accompanied by a comprehensive framework to control systemic risk, including policy measures to address the market failures arising from the NBFI (i.e. adopting a macro-prudential approach). The main building blocks of such a framework could be built around the following: determining the correct pricing of backstops; resolving the trade-off between systemic risk and intermediation costs; mitigating the risk of runs on money market funds; resolving the agency problems in some non-bank financial transactions.

The financial stability concerns stemming from this sector represent compelling reasons to fill the regulation gap that exists with respect to other segments. Pressures for a rollback of the post-financial crisis reforms (motivated in part by the need to respond to the consequences of COVID-19) should be resisted, since they could undermine the important progress made so far in improving financial stability.