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The value of assets held by insurers, private credit providers, hedge funds and other non-bank financial groups grew at more than double the rate of those in the banking sector last year as concerns grow about the opacity and potential risks posed by the sector.
The assets of these non-bank groups rose in value by 9.4 per cent to $256.8tn in 2024, meaning they accounted for more than half of global financial assets for the first time since the Covid-19 pandemic, according to research published by the world’s financial stability watchdog on Tuesday.
By contrast, the value of heavily regulated banks’ assets rose 4.7 per cent to just over $191tn in 2024, the Financial Stability Board said.
The figures come as supervisors grow increasingly concerned about the opacity and potential risks non-bank groups could present, as well as their links back to the traditional banking system.
Since the 2008 banking crisis, the provision of finance has shifted from traditional lenders’ balance sheets towards other firms that behave like banks but are more lightly regulated.
The FSB, which was set up by the G20 group of countries after 2008 to co-ordinate global financial regulation, warned of several risks stemming from the growth of non-bank finance.
“Vulnerabilities related to leverage, maturity and liquidity mismatches can amplify shocks in the financial system, such as sudden corrections in asset prices or bouts of financial market volatility, as was observed in early August 2024,” it said, referring to a sharp sell-off in US equities and other assets that some regulators blamed partly on leveraged hedge funds unwinding their positions.
The FSB said growing interconnections between non-banks and banks — including via loans, deposits, repurchase agreements and derivatives — were “broadening the channels through which shocks can propagate across sectors and jurisdictions”.
The watchdog also warned of “severe limitations in the availability of data for private credit in statistical and regulatory reports”. It said this was partly because “there was no standard definition of private credit activities” between countries, making it difficult to identify them.
Bank of England governor Andrew Bailey, who chairs the FSB, said recently that “alarm bells” were ringing over risky lending in the private credit markets following the collapse of car parts supplier First Brands and subprime lender Tricolor, as he drew a parallel with practices heading into the 2008 crisis.
EU insurers and pension funds had €514bn of exposure to private credit at the end of 2024, representing 5.1 per cent of their total assets, the sector’s regulator Eiopa said on Monday. It warned of heightened risks because private credit assets could be “illiquid and difficult to sell or redeem quickly”.
Non-banks have been central to several episodes of market turmoil in recent years. These include a dash for cash in bond markets after the pandemic hit in 2020, the collapse of family office Archegos Capital Management in 2021 and the UK gilt market meltdown in 2022.
The IMF warned this year that US and European banks’ $4.5tn exposure to hedge funds, private credit groups and other non-bank financial institutions could amplify any downturn and transmit stress to the wider financial system.