Research Highlights

Where Do Banks End and NBFIs Begin?

headshots of viral acharya and bruce tuckman

Overview: In the paper “Where Do Banks End and NBFIs Begin?” NYU Stern Professor Viral Acharya and Clinical Professor Bruce Tuckman, along with co-author Nicola Cetorelli (Federal Reserve Bank of New York), argue that banks and non-bank financial intermediaries (NBFIs) are not operating in parallel with or as substitutes for each other, but instead are intricately intertwined. In this "transformation view" NBFIs and banks dynamically recast their businesses so as to reduce regulatory burdens, while harnessing the funding and liquidity advantages of bank deposit franchises and access to government safety nets. Therefore, systemic risk must be viewed holistically, across both the NBFI and bank sectors. 

Why study this now: Before the global financial crisis (GFC), NBFIs and banks operated in a more parallel fashion. However, over the past decade, assets of NBFIs (e.g., nonbank mortgage originators, nonbank lenders to corporations) have grown substantially relative to those of banks, and the two sectors have become increasingly intertwined, including bank provision of credit lines to NBFIs. As a result, the loss of NBFI intermediation activity during a crisis can harm the real economy and add stress to the banking system. 

What the authors found: Looking at the asset and liability interdependencies in the United States from regulatory and financial accounts data and case studies, the authors conclude that “banks are not particularly asset- or liability-dependent on any particular NBFI sub-sector, while several NBFI sub-sectors are asset- or liability-dependent on banks.” These connections have significant systemic risk implications.

What does this change: The authors propose regulatory measures consistent with the transformation view, including holistic supervision, addressing moral hazards, dynamic regulation, and principles-based criteria that impose safeguards on important NBFIs during stress.

Key insight: “Banks and NBFIs operated more in parallel before the GFC. Since then, post-GFC reforms have encouraged transformations that split intermediation activities across NBFIs and banks so as, in fact, to make the sectors more interdependent,” say the authors. “In the transformation view of the NBFI and bank sectors, not only can NBFIs be sources of systemic risk, but their fate in a crisis is intricately interwoven with that of banks.”