The Basics of Nonbank Financial Institutions

Introduction

• Nonbank Financial Institutions (NBFIs) are a significant part of the U.S. financial system, larger in assets than U.S. banks.
• They provide a variety of financial services without a banking license.
• Importance for Federal Reserve's monetary policy, supervision, and financial stability.

What Are Nonbank Financial Institutions?

• Definition: Financial companies not classified as banks, perform financial services.
• Examples of NBFIs:
  • Investment Funds: Mutual funds, ETFs, money market funds, private funds (hedge funds, private equity funds).
  • Pension Funds: Invest contributions from workers and employers, drawn by retirees.
  • Insurers: Offer financial protection from risks in exchange for premiums.
  • Government-Sponsored Enterprises (GSEs): Federally chartered, privately owned to support credit flow (e.g., Fannie Mae, Freddie Mac).
  • Financial Broker-Dealers: Act as market-makers, provide liquidity.
• Other NBFIs include mortgage originators, fintech companies, principal trading firms, etc.

Size and Growth of Nonbank Financial Institutions

• NBFIs have dramatically grown, holding over $100 trillion in assets.
• More than three times larger than the U.S. banking system.
• Significant growth in investment and pension funds since 2007.
• NBFIs originate 67% of all U.S. residential mortgages.

Importance to the Federal Reserve

• Monetary Policy: NBFIs help in transmitting monetary policy via trading counterparty relationships (e.g., broker-dealers, money market funds).
• Prudential Supervision: Banks have significant interconnections with NBFIs, impacting supervision.
• Financial Stability: NBFIs are major capital sources, risks in them can pose broader financial stability risks.
  • Examples: Lehman Brothers' failure, AIG's government support, money market funds' interventions.

Summary

• NBFIs have grown significantly, becoming a majority of the U.S. financial sector.
• They play an essential role in financial markets, impacting monetary policy, supervision, and stability.
• New York Fed maintains resources for understanding NBFIs.