Publication - The role of euro area non-monetary financial institutions in financial intermediation
With bank lending staging a slow and protracted recovery in the wake of the global financial crisis, non-monetary financial institutions (non-MFIs) have expanded their share of financial intermediation in the euro area. In doing so, they have helped to mitigate the effects of the financial and sovereign debt crises on the euro area economy. At the same time, the observed shift in intermediation towards institutions other than banks may have implications for monetary policy transmission. Differences in regulation and supervision, in particular, appear to motivate some non-MFIs to adjust their risk exposures more quickly than banks in response to changes in the business and financial cycles, thereby accelerating the transmission of monetary policy, while other sectors, like long-term institutional investors, may have a stabilising impact. In this respect, the rising role of non-MFIs that are subject to less regulation and supervision has to be assessed for its possible repercussions on monetary policy transmission. In addition, the interplay of all financial intermediaries needs to be monitored from a monetary policy perspective.
1 Introduction
With lending by monetary financial institutions (MFIs) recovering only slowly, financial institutions outside the MFI sector have accounted for a rising share of financial intermediation in the euro area since the global financial crisis.1 Between the end of 2008 and the fourth quarter of 2015, non-MFIs expanded their share of financial assets held by euro area financial corporations from 42% to 57%. 2 They have thus helped channel funding to the various sectors of an economy whose financial intermediation has traditionally mainly relied on banks. 3
The interaction of several factors, both cyclical and structural in nature, can be identified as being among the key drivers of this shift. On the side of euro area banks, lending has languished as they have dealt with the fallout from the global financial crisis and the euro area sovereign debt crisis. This reduced supply of finance from banks is one cause of the rise of intermediation by non-MFIs. At the same time, the rise of non-MFIs has been supported by the low level of interest rates in the wake of the financial crisis, as well as longer-term structural factors, including demographic trends and population ageing. These have led to an increase in purchases of products offered by insurance corporations and pension funds (ICPFs) and to higher investment flows into non-money market fund investment funds (nonMMF IFs), as returns on existing pension schemes have lagged behind objectives. In addition, regulatory arbitrage may have transferred some intermediation activities from banks to non-MFI sectors.
Structural change in euro area financial intermediation, such as the shift from MFIs to non-MFIs, has implications for monetary policy transmission. Most of the transmission channels of monetary policy work by influencing the way in which financial intermediaries provide funding to the economy. In this setting, banks retain a major role in the euro area. However, the growing importance of non-MFIs makes them increasingly relevant for the propagation of monetary impulses. In this role, non-MFIs may react differently from banks to changes in the monetary policy stance, thereby altering the way monetary policy is transmitted through financial markets and intermediaries' balance sheets to the real economy.
In particular, some non-MFIs may accelerate the transmission of monetary policy. Specifically entities in the other financial institution (OFI) sector may react faster than banks to monetary policy impulses and changes in the economic and financial outlook. This means that they also retrench more rapidly in times of crisis. Part of this is associated with the less stringent regulation and supervision some non-MFIs are subject to. By contrast, banks as deposit-taking institutions hold reserves with central banks and act as their direct counterparties in monetary policy operations. For this reason they also generally enjoy a public sector backstop associated with extensive regulation and supervision.
Consequently, understanding trends and developments in the euro area nonMFI sectors is crucial for monetary policy. Against this background, Section 2 of this article provides a brief overview of academic findings on the role of the non-MFI sectors in monetary policy transmission. Section 3 describes and analyses the role of non-MFIs within the financial system of the euro area, while Section 4 focuses on the trends observed for the individual constituents of the euro area non-MFIs. Sections 3 and 4 both provide examples of developments that have implications for monetary policy transmission stemming from the findings presented in Section 2. Section 5 concludes.
page source http://www.ecb.europa.eu/pub/
