The rise of non-bank financial intermediaries (NBFIs)
In this commentary, Agustín Carstens explains how NBFIs represent a new challenge to central banks. NBFIs share of global financial assets is now larger than that of banks. He argues:
The GFC [great financial crisis] heralded a clear shift in central banks’ role as lenders of last resort to more than just banks, and the Covid-19 crisis took this shift further. During the GFC, central banks broke new ground with the scale and breadth of their measures, particularly in terms of eligible counterparties and collateral. During the Covid-19 crisis, a striking feature was the prevalence of interventions aimed at NBFIs, including entities such as mutual funds.
Going forward, Carstens calls for fundamental adjustments to the regulatory framework for NBFIs in order to reduce their systemic impact. This implies:
- Enhanced reporting to strengthen the ability of authorities to monitor NBFIs;
- Higher and usable capital and liquidity buffers. More specifically, the imposition of limits to convertibility into cash and less reliance on redemption methods that presume liquid markets;
- Adoption of a less fragmented and more consolidated supervisory perspectives: existing regulations were formulated with specific financial stability risks in mind but may be inadequate for addressing the combination of policy concerns to which these new players give rise to.
Central Banks Adapt to New Challenges
By: Agustín Carstens-BIS
Great uncertainty over r*
One other issue that can affect the transmission of policy rates to output through the Investment-Savings (IS) curve is uncertainty over how neutral real interest rate (r*) has been affected by the pandemic. Possible reasons why r* could now increase include:
- The readiness to use fiscal policy to counteract recessions, as was done during the pandemic, which may increase global demand as well as the supply of safe assets;
- The postponement of climate investment during the pandemic might spur much-needed large-scale catch-up public investment.
How Will The Pandemic And War Shape Future Monetary Policy? – Analysis
By: Gita Gopinath- IMF
