Remarks by FDIC Chairman Martin J. Gruenberg on the Financial Stability Risks of Nonbank Financial Institutions
WASHINGTON – Today, Federal Deposit Insurance Corporation (FDIC) Chairman Martin J. Gruenberg addressed The Exchequer Club in Washington, DC on the financial stability risks of nonbank financial institutions.
“Nonbank financial institutions are critical intermediaries in the U.S. financial system, alongside traditional banking organizations. The Financial Stability Board of the G-20 countries estimates assets of U.S. nonbank financial institutions totaled roughly $20.5 trillion in 2021, compared to $23.7 trillion in assets held by U.S. insured depository institutions. This represents around 30% of nonbank assets globally.
“Prior to the bank failures and broader market stress we experienced this past spring, the U.S. had experienced two significant economic stress events in recent years: the Global Financial Crisis of 2008 and the COVID-19 pandemic beginning in 2020. While very different events, both had a significant impact on the global economy and financial sector. Both necessitated extraordinary fiscal and monetary policy support to avoid a financial collapse. In response to each event, both banks and nonbanks benefitted from this extraordinary public support.
“Yet, notwithstanding multiple rounds of fiscal and monetary policy support to both banks and nonbanks in crisis circumstances, the regulatory landscapes in which they operate remain quite different. Since nonbanks do not have direct access to the public safety net, they are generally not subject to the same degree of regulation and supervision as banking organizations. As a result, they often have less transparency in their operations, as well as reliance on excessive leverage and volatile funding sources.
“When market shocks combine with these vulnerabilities, nonbank financial institutions can transmit risk into other parts of the financial system and seriously hamper the credit and financial intermediation needed to support the economy. This includes banking organizations, which often interact directly with nonbanks by providing funding to support nonbank activity. The resulting interconnections may amplify market stresses through feedback between the two sectors.”
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