Officials at the International Monetary Fund (IMF) have warned that investment funds and non-bank financial intermediaries (NBFI) risk global financial stability and have called for robust surveillance of the sector.
NFBIs, often referred to as the ‘shadow banking’ sector, include investment funds, pension funds and insurance companies and now account for nearly 50% of global financial assets.
Their smooth function is “vital for financial stability”, the IMF officials said.
The warning is contained in the IMF’s April 2023 ‘Global Financial Stability Report’ and was highlighted in the latest IMF blog, authored by senior officials responsible for global market analysis.
They said policymakers must ensure they had the right tools to tackle any turmoil in the shadow banking sector.
“Robust surveillance, regulation and supervision are essential pre-requisites,” stated the IMF report.
According to the authors, NBFI vulnerabilities have increased in the last decade with risk typified by high leverage and liquidity mismatches.
The blog highlights the LDI crisis in autumn 2022 as an example of the ‘perilous interplay’ between these forces.
The sudden spike in long-dated gilt yields in the wake of last September’s mini-budget sent pension funds scrambling for liquidity and reinforcing the falls in gilts.
The knock-on effects included a wave of fund outflows that month, with a record net £27.9 billion redeemed from UK equity funds, £5.1 billion from alternative funds and £4.7 billion from fixed income funds, according to Refinitiv.
The IMF officials warned the high levels of interconnectedness between NBFIs and banks could become “a crucial amplification channel of financial stress”.
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