Regulators to continue monitoring the sector
The risks to financial stability posed by non-bank financial intermediation (NBFI) in Australia remain contained, according to the Reserve Bank of Australia (RBA).
According to a report, authored by Stefano Tornielli di Crestvolant (pictured left) and Marcus Robinson (pictured right) of the central bank’s Financial Stability Department, the size and interconnectedness of riskier NBFI activities in the financial system are modest, with a declining integration with the core banking system.
It also noted that non-bank lenders have shifted towards higher-risk market segments, though their share in the total credit market remains small.
The RBA report also found minimal financial stress among NBFI owners of Australian commercial real estate (CRE). Yet, concerns persist that stress in international CRE markets could influence the domestic scene.
Also, the significant use of over-the-counter (OTC) derivatives by NBFIs continues, driven primarily by hedging and market-making, rather than speculative purposes.
April Bulletin article 'Financial Stability Risks from Non-bank Financial Intermediation in Australia' by Marcus Robinson and Stefano Tornielli di Crestvolant can now be read on our website: https://t.co/8zfgKqhCfb
— Reserve Bank of Australia (@RBAInfo) April 29, 2024
NBFIs, which include entities like superannuation funds and non-bank lenders, offer vital financial services but do not possess a banking license. These institutions are instrumental for a range of financial services, from investment management to facilitating market trading.
Despite their benefits, NBFIs can introduce financial instability due to their size, complexity, and interconnections with both domestic and global financial systems.
In recent years, vulnerabilities within the NBFI sector have materialized in advanced economies, contributing to market dysfunctions. Examples include the US Treasury market upheaval in 2020 and significant losses from the Archegos collapse in 2021. The RBA said that despite these international incidents, the Australian financial system has shown resilience.
The recent reversal in growth of non-bank housing credit in 2023 is attributed to rising interest rates and increased competition from large banks. Non-bank mortgage arrears have also risen, reflecting the sector’s sensitivity to economic shifts. However, comprehensive mitigating factors like loan warehouse limits help maintain control over loan quality.
The Council of Financial Regulators (CFR) continues to monitor the NBFI sector, particularly focusing on their activities in commercial real estate and their use of OTC derivatives.
“As already noted, NBFI risks in Australia are more contained,” part of the report read. “However, work continues by the CFR agencies to improve visibility of NBFI activity in Australia as part of their ongoing monitoring of developments in NBFIs and any potential systemic risks for the Australian financial system.”
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