Examples of types of NBFIs include investment funds, pension funds, insurers, government-sponsored enterprises, and financial broker-dealers.
Source: Federal Reserve Bank of New York
By Logan Herman, Timothy Higgins, Adam Minson, and Sigurd Ulland
Originally published in blog, “The Teller Window“
NOVEMBER 21, 2024
There is a vast set of U.S. financial institutions that sit outside the banking system. These companies, which are called “nonbank financial institutions” (NBFIs), are collectively much larger than U.S. banks, as measured by assets, and perform a broad array of services for the U.S economy. In this article, we discuss the universe of NBFIs and their importance for the Federal Reserve’s monetary policy, supervision, and financial stability objectives.
What Are Nonbank Financial Institutions?
Casting the widest possible net, NBFIs are financial companies that are not banks. They are a diverse set of entities that primarily perform financial services, but do not have a banking license. Examples of types of NBFIs include investment funds, pension funds, insurers, government-sponsored enterprises, and financial broker-dealers.
Investment funds allow individuals and institutions to pool and invest capital in an array of economic ventures to earn a return and share risk. Examples of investment funds are mutual funds, exchange-traded funds, money market funds, and private funds. Mutual fundshold portfolios of securities owned by investors who have purchased shares in the fund. Exchange-traded funds (ETFs) are similar to mutual funds, but investors can buy and sell the fund’s shares on exchanges. Money market funds are a type of mutual fund that invests in high-quality, short-term assets and are generally used by investors to store cash. Private funds include hedge funds, private equity funds, and others that are only open to certain qualified investors. Like mutual funds, they are pooled investment vehicles, but they are permitted to take on greater risk.
Pensions take in contributions from workers and employers and invest those funds to be drawn by employees after they retire. Private pension plans are offered to and administered on behalf of private sector workers, while public pension plans are generally for federal, state, or local government employees.
Insurers allow businesses and individuals to financially protect themselves from a range of risks in exchange for regular payments, or premiums. The largest categories of financial insurance are property-casualty for damage to property or injury to others and life insurance, which pays out a benefit in the event of death to surviving beneficiaries.
Government-sponsored enterprises (GSEs) are federally chartered but privately owned corporate entities that help support the flow of credit to specific sectors of the economy. The largest are Fannie Mae, Freddie Mac, and the Federal Home Loan Banks, which were established to support U.S. housing and the availability of mortgages.
Financial broker-dealers are firms that principally act as financial market-makers by matching buyers and sellers of various financial products and as providers of liquidity in those markets. Broker-dealers can perform this role for large institutions looking to take sophisticated market positions or for individuals who want to trade stocks or ETFs. Some broker-dealers serve as primary dealers for the Federal Reserve’s monetary policy operations.
Other NBFIs that do not fall into the above categories are collectively large, important, and highly diverse. They include mortgage originators and servicers, real estate investment trusts, central counterparties, securitization vehicles, nonbank consumer lenders that offer auto loans, credit cards, or student loans, fintech companies, and principal trading firms (PTFs), among many others.
It is important to note that many NBFIs are highly diversified and complex, with activities beyond the business models summarized above.
Size and Growth of Nonbank Financial Institutions
Over the past 50 years, NBFIs have grown dramatically. With over $100 trillion in assets, they are now more than three times larger than the U.S. banking system, according to figures from the Financial Accounts of the United States. In the chart below, we show the scale of NBFIs relative to that of banks and the U.S. economy, measured as a share of Gross Domestic Product (GDP).
Assets as a Share of GDP
In the chart below, we further explore this trend by showing the size of particular NBFI categories. The most notable growth has been among investment and pension funds, which have each seen asset levels increase by $15 trillion to $20 trillion since 2007. Economists at the New York Fed and elsewhere have explored these growth trends in greater detail, often examining how banks and NBFIs have grown together.
Total Assets
Note: Private funds (e.g. hedge funds, private equity funds, and private credit funds) are not captured in these data. Therefore, investment fund figures reported here may be significantly below their true levels.
Of note, these NBFI figures would be even larger if private funds, such as hedge funds and private equity funds, were included. Private funds are known to be very large in aggregate, but their reporting is not directly comparable to the Financial Accounts data that report the size of other NBFIs. Illustratively, data from the Securities and Exchange Commission (SEC) show that global private funds held $23 trillion in assets at the end of 2023.
NBFIs are increasingly important in providing credit, not just to other financial institutions, but also to the real economy—businesses and individuals seeking to borrow to invest or to purchase real assets like property and housing. For example, a 2024 report by the Financial Stability Oversight Council found that NBFIs now originate 67 percent of all U.S. residential mortgages, up from 39 percent in 2008.
Why Are Nonbank Financial Institutions Important to the Federal Reserve?
NBFIs are important to the Federal Reserve’s functions for monetary policy, supervision of major banking organizations, and financial stability. They play a key role in transmitting monetary policy, they have significant interconnections with the banks that the Fed supervises, and they help underpin the stability of the financial system.
Monetary Policy: The Fed implements monetary policy through transactions with both banks and NBFIs. Specifically, the Federal Reserve Bank of New York maintains trading counterparty relationships with NBFIs, including broker-dealers, money market funds, and government-sponsored entities. These counterparty relationships ensure the effective and efficient implementation of U.S. monetary policy through open market operations, including the Overnight Reverse Repo Facility (ON RRP) and the Standing Repurchase Agreement (Repo) Facility (SRF).
The Fed also monitors financial markets to understand monetary policy transmission, relying on market intelligence gathered from its trading counterparties and other notable market participants. These participants include NBFIs, such as asset managers, hedge funds, insurers, pension funds, endowments, and sovereign wealth funds. Learning how the stance of monetary policy—whether it is stimulating or constraining the labor market and inflation—affects the investment activities and asset allocations of these NBFIs informs an understanding of how monetary policy is being transmitted to financial markets and ultimately the real economy.
Prudential Supervision: The largest banks supervised by the Fed have significant interconnections with NBFIs. Monitoring these exposures is critical for effective banking supervision as banks can be significantly impacted by their NBFI counterparties. For example, in 2021, the default of Archegos Capital Management, a private investment firm, caused more than $10 billion in losses at several large domestic and foreign banks. The Fed also supervises and oversees certain Financial Market Infrastructures (FMIs), which can be considered NBFIs and are important intermediaries in many markets. Ensuring that banks and FMIs effectively manage their risk from NBFI counterparties is essential to the safety and soundness of these supervised entities.
Financial Stability: Because NBFIs are major sources of capital and funding to financial markets and the economy, risks in NBFIs can also pose risks to U.S. financial stability. During periods of financial stress, NBFIs can be sources or amplifiers of risk due to their leverage, funding, asset holdings, or interconnections. The last two decades include several examples of this. The failure of securities dealer Lehman Brothers in 2008 shook the financial system and broader economy during the global financial crisis. In the same period, the insurance company AIG required extraordinary government support to avoid even larger disruptions to the U.S. financial system. Money market funds also required government intervention in 2008 and 2020 to stabilize short-term funding markets after these funds experienced significant outflows. Also in March 2020, hedge funds and open-end funds liquidated positions at a scale that contributed to significant disruptions in the Treasury market. The Fed and other member agencies work through the Financial Stability Oversight Council to evaluate these and other financial stability risks that may be posed by NBFIs.
To Sum Up
Having grown from $40 trillion to over $100 trillion in assets over the past 20 years, NBFIs make up the majority of the U.S. financial sector and play an increasingly important role in U.S. financial markets and the economy. NBFIs’ importance comes with significant implications for monetary policy, prudential supervision, and financial stability—core responsibilities of the Fed in its service to the public. At the New York Fed, we maintain a curated selection of research, analysis, and external resources to facilitate understanding of these important institutions.
Logan Herman is a Policy, Strategy, and Analytics Associate in the New York Fed’s Supervision Group.
Timothy Higgins is a Policy, Strategy, and Analytics Specialist in the New York Fed’s Supervision Group.
Adam Minson is an Advisor in the New York Fed’s Supervision Group.
Sigurd Ulland is a Policy and Market Analysis Advisor in the New York Fed’s Markets Group.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
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