Thank you for the invitation to be with you today. The Securities Industry and Financial Markets Association (SIFMA) annual conference covers a broad spectrum of issues that are timely and relevant to the current work of the Financial Stability Board, or FSB, and I am grateful for the opportunity to be part of it.
The shocks related to COVID-19 and the associated containment measures, which I refer to as the “COVID Event,” have sharpened the FSB’s focus on the role of capital provision, the functioning of financial markets, and different aspects of nonbank financial intermediation, or NBFI for short. The FSB’s annual NBFI monitoring report estimates that the sector now accounts for almost 50 percent of total financial intermediation globally, up sharply in the last decade. With this growth has come greater interconnectedness. Many NBFIs rely on the banking system for credit and backstop liquidity. The interconnectedness of our financial system means that it is not enough to understand the vulnerabilities arising from the banking sector. We must also understand vulnerabilities in the nonbank sector and how shocks are transmitted to or from the nonbank sector.
To address this need for a broader perspective, last year I formed a high-level steering group of central bankers and market regulators to oversee the FSB’s work on nonbank finance and to help coordinate with various global financial standard-setting bodies. The COVID Event in March tested the resilience of the financial system, and the NBFI steering group has used the past few months to begin identifying the parts of the NBFI sector that did not exhibit sufficient resiliency. While our analysis is not final, the group is currently completing a holistic review of the impact the COVID Event had on financial markets in March, especially dislocations in key funding markets and credit supply, to better understand the role that vulnerabilities stemming from the NBFI sector played.
Today, I want to share with you some of the emerging elements of the FSB’s review of the COVID Event, primarily how the shock moved through the financial system and which critical vulnerabilities it exposed. I also want to outline further work that the FSB plans to conduct in light of this experience, including a more in-depth assessment of how various segments of the NBFI sector performed. Going forward, I expect the NBFI sector to be an ongoing focus of the FSB.
The Global Financial System and Economy Prior to the Shock
When COVID-19 emerged early this year, the global financial system was in several ways fundamentally different than it was at the outset of the financial crisis of more than a decade ago. Regulatory reforms implemented in response to that crisis, changes in technology, developments in U.S. dollar funding, and, importantly, the growth of NBFI all contributed to a changed landscape.
Beyond the growth of the NBFI sector, there has also been considerable change within this sector. Business models and financial services provided by NBFIs have become more diverse. This variation can be seen in new products, services, and financial models. New types of markets-for example, private debt markets-and new forms of intermediation, such as fintech credit, have sprung up. Investments by nonbank entities in certain credit products, such as fixed income exchange traded funds and collateralized loan obligations, and participation in some credit segments, such as mortgage and consumer finance, has grown. Change is also evident in how the sector operates in different jurisdictions. For example, provision of credit by nonbank fintech lenders varies greatly across FSB member jurisdictions. In sum, nonbanks now play a larger and more diverse role in financing the real economy and managing the savings of households and companies.
The past decade also saw an evolution in the global U.S. dollar funding landscape. While the U.S. economy forms a smaller percentage of global gross domestic product than in the past, the U.S. dollar still dominates international finance as a funding and investment currency, and its widespread use has given rise to a complex and geographically dispersed network of financial relationships. This means global economic and financial activity is highly dependent on the ability of U.S. dollar funding to flow smoothly and efficiently between users. In contrast to bank intermediation, market-based financing in U.S. dollars has outpaced the growth of the global…