Banking and Finance Law Daily Wrap Up, BANKING OPERATIONS—Basel Committee report traces growth in connections between banks and non-bank financial intermediaries, (Jul 14, 2025)

By Suzanne Cosgrove

Linkages have been shaped by market conditions and by regulatory reforms over the last several years, but with that growing interdependence comes risk, the report found.

The Basel Committee on Banking Supervision released a report on the growing interconnection between banks and non-bank financial intermediaries (NBFIs), which includes investment funds, insurance companies, pension funds and other types of financial intermediaries. According to the report, the two entities have been more closely bound since the Great Financial Crisis, or GFC, but differences in their regulation may have created incentives for businesses to shift to the non-bank sector.

Banks provide leverage, clearing, market-making and underwriting services to NBFIs, trade derivatives with NBFIs and, in some cases, own NBFIs, all of which can present risks, the report noted. NBFIs also are exposed to banks through short-term cash placements, investment in securities issued by banks and trading activities.

Regulatory influences. The differences between banks and those for NBFIs supports the case for closer scrutiny of the risks associated with bank interactions with NBFIs and the development of a more comprehensive framework for addressing systemic risks in the NBFI ecosystem, the Committee said.

Regulations that have shifted the bank-NBFI landscape include new bank capital requirements since the GFC, and mandatory requirements to centrally clear. When NBFIs want to access centrally cleared products but are unable to interact directly with central counterparties (CCPs), they can do so through banks, which function as clearers. Depending on the clearing model, banks can incur a mix of counterparty and contingent liquidity risk which could crystallize if the NBFI fails to meet margin calls.

Recent or upcoming reviews of macroprudential policies for NBFIs, such as those considered in the European Commission’s recent targeted consultation, the new liquidity facility for NBFIs by the Bank of England, or the money market fund (MMF) reforms proposed or adopted in the U.S. and United Kingdom, could impact bank-NBFI linkages going forward, the report stated. Demand from NBFIs for lending by banks may decrease, and NBFI deposits with banks may increase.

Going forward, bank supervisors should carefully watch the reforms as they may reshape and further strengthen the dependencies between banks and different parts of the NBFI sector, the Committee said.

Technology’s impact. The competitive and collaborative relationships between banks and NBFIs also has been revamped by technological advances, presenting both challenges and opportunities for banks, the report noted.

Technological innovation may cause some activities to migrate from the banking sector to the NBFI sector, reducing banks’ market power. This can happen when fintech companies within the NBFI ecosystem offer innovative products and services that compete with traditional banking. For example, distributed ledger technologies can be used to process certain types of transactions without involving the banking system.

More commonly, innovation changes the role of banks in the delivery of financial services. For example, fintech brokers might draw deposits away from banks by offering attractive investment services, but they would place some customer balances with banks.

Possible scenarios. While low rates and looser financial conditions have supported the rapid growth of the NBFI sector in recent years, the tightening of monetary policy poses potential challenges to the NBFI sector by making it more expensive to obtain funding and more difficult to manage short-term financial obligations. This could potentially reduce NBFIs’ investment activities and overall profitability, and it could diminish their financial activities with banks.

And, notwithstanding banks’ increased resilience since the GFC, banks’ role as providers of services to NBFIs may make the system as a whole vulnerable to procyclical reactions during market stress. Distress in the NBFI sector may prompt banks to reduce their risk via margin calls, loan cutbacks and asset sales. While such actions reduce banks’ risk and regulatory metrics in the short term, they may amplify shocks and transmit them across the financial system.

Tight interconnections between banks and NBFIs may also lead to spillovers between these sectors when banks depend on NBFIs for risk management and risk transfer purposes, for funding, or when they own NBFI entities, the Committee said.

Data needs improvement. Finally, timely, high-frequency data are essential to understand and monitor bank-NBFI linkages, but supervisors may not have access to the data needed to comprehensively map these linkages, the report found.

Supervisory data from banks typically include variables beyond exposures that help quantify the relationships and risks between banks and NBFIs, and they are sometimes available in a granular format. However, data from NBFIs are often less comprehensive and can vary depending on the subsector considered.

Hoped-for improvements for supervisory data include increasing its granularity and frequency. However, even if individual supervisors have sufficient data to assess linkages in their jurisdiction, they may face difficulties in assessing risks due to the global scope of bank-NBFI interconnections. The collection and sharing of granular data at the international level are tightly restricted, which may impede risk monitoring, the report found.

The Committee noted steps are being taken to increase the resilience of NBFIs, for example by the Financial Stability Board, which together with the standard-setting bodies, is working to assess and address the risks from NBFIs, but “more broadly, these developments highlight the need to better understand the interlinkages and spillover effects between banks and NBFIs.”

IndustryNews: BankHolding BankingOperations CapitalBaselAccords FinancialStability GCNNews PrudentialRegulation