Bank of Japan Analyzes NBFI Evolution in Key Financial Systems
On June 27, the Japan central bank released a research paper analyzing non-bank financial intermediaries across three economies. These NBFI institutions include insurance firms, pension funds, investment funds, broker-dealers, and finance companies. Unlike banks, they do not accept deposits but engage in credit intermediation. Globally, NBFIs have expanded rapidly, now accounting for around half of the financial system by 2023. Investment funds have taken a larger share among them. However, NBFI composition and functions differ significantly by country due to distinct institutional designs and regulations.
Comparative Size and Composition of NBFI Institutions in the U.S., Japan, and Germany
The US financial system shows the largest domestic role for non-bank financial intermediaries at 50% of total assets. Japan and Germany follow, with NBFIs making up 20–30% of financial assets. In the US, investment funds dominate NBFIs, holding 60% of their total. Insurance and pension funds account for another 30%, with the rest held by other non-banks. Japan’s NBFIs mainly consist of insurance and pension providers. Germany shares the US trend of rising investment funds. Since the crisis, Japan’s foreign NBFI presence rose from 10% to 30%.
Bond markets display a different pattern, with banks holding a smaller share than NBFIs. In Japan, banks hold 30% of bonds, compared to 20% in the US. US NBFIs control 50% of bond holdings, evenly split between investment and insurance/pension funds. In Japan and Germany, NBFIs hold 40% of bonds, though the types differ. In Japan, insurance companies dominate; in Germany, investment funds lead. Japan’s foreign bondholder share rose from 10% to 30%, mainly displacing domestic banks in recent years.
Role of Banks and Non-Bank Financial Intermediaries in Loan Markets
In all three economies, banks continue to issue most loans, between 70% and 80% of the total. Still, non-bank players such as broker-dealers and finance companies are significant in Japan and the US. In Germany, European foreign banks are strong participants in the loan markets. In the US, NBFIs’ role in loan provision has shrunk due to less securitization. Germany has shifted from domestic bank loans toward foreign credit sources, changing the loan landscape since the global financial crisis.
Banks have limited influence in domestic stock markets, with their highest share under 10% in Japan. US NBFIs control over 60% of shares, and investment funds account for 80% of this. Foreign investors dominate shareholding in Japan and Germany, with 60% to 70% of shares. This indicates greater foreign control in the two equity markets compared to the US. Overall, shareholding records different patterns from bonds and loans in the three countries.
Rising Cross-Border Investment by Foreign NBFI Institutions
Cross-border investment by foreign NBFIs has become more visible in recent years, especially in Japan and Germany. Japan receives 50% of foreign investment from US-based funds, with Luxembourg and Ireland supplying another 20%. The US sees 30% of inward investment from Cayman Islands-based funds. These offshore funds often operate in US markets despite being registered abroad. This trend highlights deep global interconnection between financial systems, particularly through non-bank financial intermediaries’ cross-border capital flows.
Growing Linkages Between Domestic Banks and Foreign NBFIs and Key Conclusions
The Japan central bank emphasized three main takeaways in the paper’s conclusion. NBFIs vary in structure and importance; investment funds lead in the US and Germany; insurers and pensions dominate Japan. Second, foreign NBFIs have grown through portfolio investments, particularly from US and offshore funds. Third, banks are increasingly connected to foreign NBFIs, especially in the US and Japan. These shifts suggest rising global integration and possible risks tied to market volatility and liquidity mismatches within non-bank financial intermediaries.
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