Nonbank Finance Now Controls Half of Global Financial Assets

Nonbank financial institutions now hold and manage nearly half of the world’s financial assets, signalling a major shift in global finance away from traditional banks. These institutions – which provide credit, investment and trading services but do not accept deposits – have grown from 43 percent of global financial assets during the 2008 crisis to almost 50 percent in 2023.

According to financial analysts, five megatrends are driving this growth:

1. New Lenders for Governments – Nonbanks, including hedge funds and high-frequency trading firms, are buying government bonds, increasing market liquidity and helping keep borrowing costs low.
   Expanded Funding for Mid-Sized Businesses – Private credit funds backed by insurers, pension funds and sovereign wealth funds are providing financing to companies overlooked by banks, supporting economic activity and job creation.
2. More Borrowing Options for Consumers and Small Enterprises – Fintech lenders and mobile-based financial services have broadened access to small loans, longer-term credit, and innovative payment solutions, particularly in emerging markets such as Kenya.
3. Portfolio Diversification for Investors – Investment funds, including index and passive funds, offer access to a wider range of asset classes, from commercial real estate to precious metals, enabling risk management and stabilising markets.
4. Stabilising Markets Through Passive Investment – Certain funds automatically buy or sell stocks based on index composition, creating predictable market flows that can help moderate price volatility.

However, regulators warn that nonbank growth carries risks. Open-ended funds can face liquidity crises, and leveraged hedge funds may trigger market contagion if investments fail, as seen with the 2021 collapse of Archegos Capital Management.

Experts recommend stronger data collection, improved risk analysis, and enhanced supervision to monitor nonbank activities and reduce systemic risks, while still allowing innovation and broader access to financial services.