US | Nonbank financial intermediation, financial sector stability, and policy implications

Summary

Nonbank financial intermediation represents a large share of the U.S. financial sector. In times of crisis, it has been supported by the primary banking regulator - the Federal Reserve. In the absence of changes in oversight, this could lead to increased moral hazard and financial instability over the long run.

Key points

• Key points:
• Banks and other depository institutions account for a limited share of the U.S. financial sector.
• The non-bank financial sector, highly innovative and valuable as it is, might be too big to fail.
• Non-banks have benefited from increasing policy accommodation over the last four financial cycles.
• Multiple market dynamics now exhibit carry trade characteristics.
• Increased moral hazard and fragility might require a change in the overall regulatory approach.

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