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The value of assets by these groups — which include private credit providers, hedge funds and insurance companies — grew at more than twice the rate of assets in the banking industry during 2024, the Financial Stability Board (FSB) said in a report Tuesday (Dec. 16).
In 2024, the report said, the non-bank financial institution (NBFI) sector grew by 9.4%, while the banking sector grew by 4.7%. The NBFI space increased its total assets to 51% ($256.8 trillion) of total global financial assets, compared to $191 trillion for banks.
Still, the banking and NBFI worlds are increasingly interconnected, the report said, “broadening the channels through which shocks can propagate across sectors and jurisdictions.”
In addition, the FSB flagged “severe limitations in the availability of data for private credit in statistical and regulatory reports,” in part because “there was no standard definition of private credit activities” between countries, making it tough to identify them.
According to the FSB, the jurisdictions covered in the report identified a “diverse set of non-bank entities engaging in private finance.” This included private credit groups along with trust companies, finance companies, structured finance vehicles, insurers and pension funds.
The report comes a little less than a month after the FSB held a meeting in which its members discussed efforts to bolster the NFBI sector’s resilience.
“Members noted that nonbank entities are increasingly important participants in the markets for government debt, but their use of highly leveraged trading strategies could amplify market volatility and instability, potentially across borders, in the event of a rapid unwinding of positions,” the FSB said in a news release at the time.
The FSB isn’t the only group concerned about this sector. The International Monetary Fund (IMF) in April issued a report highlighting trouble in the private lending space.
Upward of 40% of the companies who borrowed from these lenders had, at the end of last year, negative cash flow from their operations, the IMF’s Global Financial Stability report found.
And as covered here in May, data from the Federal Reserve Bank of Boston shows that large banks’ total commitments to private credit (PC) and private equity funds came to $300 billion as of the end of 2023, up from less than $10 billion in 2013.
When these firms are hit by shocks, the Fed said, “they tend to draw down their bank lines of credit at a faster rate than firms with only bank credit. This creates a channel through which PC funds may increase banks’ credit and liquidity risks, on balance.”
