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The growing role of non-bank financial institutions (NBFIs) such as pension funds, insurance companies, hedge funds, and money market funds could introduce significant risks to financial stability, according to Dave Ramsden, Deputy Governor for Markets and Banking at the Bank of England.
Speaking at the Official Monetary and Financial Institutions Forum in London on December 9, Ramsden highlighted that NBFIs now manage nearly half of the total assets in the financial systems of both the U.K. and the world. This shift, driven by changing patterns in consumer and business savings and borrowing, is emerging as a defining theme for 2024.
“While this transition can offer benefits such as diversifying intermediation channels, reducing concentration, and enhancing risk-sharing, it also creates new liquidity risks that challenge financial stability, especially in the context of the post-global financial crisis environment,” Ramsden said.
Managing Stability Amid Emerging Risks
Ramsden emphasized that the relative stability observed in 2024 does not equate to long-term security. Drawing lessons from past events, such as the 2023 collapses of Silicon Valley Bank and Credit Suisse and the economic shocks of 2022, he warned against complacency.
“This year’s calmer financial markets might tempt increased risk-taking in the future. Vigilance is essential, with a focus on continuous risk monitoring and strategic use of our balance sheet to maintain stability,” he stated.
Strengthening Liquidity Preparedness
To address potential risks, the Bank of England has prioritized enhancing its capacity to support NBFIs during liquidity crises. In November, the central bank unveiled plans to facilitate lending to NBFIs, safeguarding critical financial markets from disruptions.
Findings from the Bank’s recent systemwide exploratory scenario exercise underscored the growing resilience of NBFIs but also highlighted the possibility of emerging systemic vulnerabilities. Ramsden cautioned that unchecked changes within these institutions could amplify risks across the broader financial ecosystem.
Laying the Groundwork for Sustainable Growth
Ramsden underscored the importance of proactive measures and regulatory oversight to maintain financial stability while fostering sustainable economic growth.
“Effectively managing our balance sheet operations is central to ensuring stability and creating the conditions necessary for long-term growth,” he concluded.
As NBFIs continue to expand their influence, the Bank of England remains steadfast in its commitment to monitoring and addressing the unique challenges these institutions pose, ensuring the resilience of the financial system in an ever-evolving economic landscape.
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