The potency of monetary policy is, on average, stronger in countries whose financial sectors are dominated by non-banks, with these entities increasing the impact of these measures on the real economy, shows new research by the International Monetary Fund.
The IMF said in a chapter of its Global Financial Stability Report, to be published in full Oct. 5, that the growth of non-banks providing credit has increased the effectiveness of monetary policy over the past 15 years. These institutions include pension funds and insurance companies.
“The chapter finds that the increasing importance of non-banks for financial intermediation has, if anything, strengthened monetary policy transmission over the past 15 years,” the report said.
As with traditional banks, non-banks also contract their balance sheets when monetary policy tightens. In general, they cut credit even more.
“This behavior is in part explained by the effect of monetary policy on risk taking, particularly in the asset management sector,” the report said.
That results in moves in bond yields and risk premiums, and affects the cost of borrowing and real activity. “Thus, the composition of the non-bank financial sector matters for the transmission of monetary policy,” it noted.
With increased regulation and requirements on banks, non-banks have stepped in to fill the gap in financing and providing credit to economies. These non-banks have increased the transmission of monetary policy to the real economy. “As a consequence, the conduct of monetary policy will need to continue to adapt to changes in the composition of the financial system,” said Luis Brandao Marques, lead author of the report and a senior economist in the IMF's global financial stability analysis division, in a statement accompanying the research.
The IMF said central banks should take into account the size and composition of banks and non-banks' balance sheets, to better gauge changes in risk appetite. Countries should also continue to improve data collection regarding non-banks, the IMF said.