The Bank for International Settlements published a bulletin analysing the rapid rise of non-bank financial institutions (NBFIs) and how this structural shift is affecting monetary policy transmission. The paper concludes that NBFIs can both dampen and amplify transmission depending on their business model, and that the growing role of investment funds in particular is likely strengthening transmission while making it less stable, reinforcing the case for gradual but flexible policy adjustment. In major advanced economies, total NBFI assets now average around 400% of GDP and exceed bank assets, with the median emerging market economy also showing NBFI assets surpassing banks. Growth has been driven mainly by investment funds, including hedge funds, alongside an expansion of bond market intermediation associated with rising government debt. The analysis links leverage and maturity or liquidity mismatches in parts of the NBFI sector to stronger amplification channels, with cross-country evidence suggesting “other financial institutions” are associated with greater pass-through to long-term yields, broader financial conditions and real GDP, while a larger insurance and pension fund sector tends to dampen some effects. Transmission is also found to be more state dependent, with one example showing a 100 basis point US policy rate shock associated with a roughly 120 basis point increase in 10-year yields when hedge fund trading activity and leverage are high, and little impact when they are low, while bond purchase announcements appear more effective when hedge fund activity is low. The paper also points to potentially larger cross-border spillovers via investment fund flows, particularly to emerging market economies, and highlights operational questions for central banks, including the conditions under which NBFIs might access central bank liquidity.

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