A financial system bigger than its bank balance sheets
The global financial system is increasingly financed, intermediated and invested through institutions that are not conventional banks. Investment funds, money market funds, insurers, pension funds, finance companies and private lenders connect savers with borrowers through different balance sheets and regulatory structures. Their growth is not necessarily a weakness. It can diversify financing channels, distribute risk and give businesses more options when bank credit is constrained. Yet it also changes where vulnerabilities can develop and how quickly market stress can spread.
The Financial Stability Board (FSB) reported that nonbank financial intermediation grew 9.4% in 2024, compared with 4.7% for banks. The sector represented 51% of total global financial assets, or approximately $256.8 trillion, in the FSB's monitoring universe [1][2]. These are figures for 2024 published in December 2025, not a real-time measure of 2026 conditions. Their significance lies in the scale of financing that now sits outside traditional deposit-taking institutions.
Why size alone does not establish danger
The term nonbank finance brings together very different businesses. A long-term pension fund holding diversified securities does not face the same liquidity profile as a leveraged fund using short-term borrowing. An insurer with predictable liabilities differs from a money market fund whose investors may expect prompt redemptions. Treating every institution as equally fragile would obscure the actual channels of risk.
A useful analysis asks three questions: what assets does the institution hold, how are they financed and who absorbs losses when prices change? The answers reveal potential mismatches. Long-term or difficult-to-sell assets financed with short-term obligations can become a problem if investors demand cash quickly. High leverage can turn modest price changes into significant pressure to sell. Concentrated exposures can connect institutions that appear diverse on paper. The FSB's monitoring framework accordingly examines particular economic functions and vulnerabilities rather than assuming that every nonbank business has the same systemic importance [1].
The connections that run back through banks
A common misconception is that financial activity outside banking remains isolated from banking stress. In practice, banks supply credit lines, act as prime brokers, provide custody and settlement services, and lend against securities. Nonbank investors in turn hold bank-issued bonds, place deposits and trade with bank dealers. The FSB's 2025 report identifies funding and deposit relationships, bank credit exposures, and holdings of bank securities as important connections [1].
These relationships may be routine in normal markets. During disruption, however, several demands can arrive together: a fund seeks cash, a lender reviews collateral, a dealer reduces inventory and a bank faces clients drawing liquidity facilities. The transmission mechanism matters more than the formal label on each institution. For supervisors and bank risk teams, mapping counterparties must include the entities and funding vehicles that sit behind a direct customer relationship. An exposure that appears diversified by legal name may still depend on a shared source of leverage or market liquidity.
Private credit changes the visibility problem
Private credit illustrates both the opportunity and difficulty. Borrowers that cannot obtain the structure or flexibility they seek from a bank may use a direct lender. Investors can gain access to income streams that differ from publicly traded bonds. But private deals often involve negotiated terms, limited public pricing and less frequent valuation. This can make performance appear stable between assessment dates without eliminating the underlying credit risk.
The FSB has specifically highlighted gaps in the regulatory and statistical reporting of private finance and credit [1][2]. That is not evidence that every private credit portfolio is poor quality. It means analysts may lack comparable data about leverage, maturity, borrower overlap and potential loss transmission. A bank considering exposure to a private credit fund should therefore assess the underlying asset profile, valuation policy, financing terms and liquidity arrangements rather than relying solely on a fund's headline return or stated diversification.
Liquidity is a behaviour, not simply a ratio
Liquidity risk becomes visible when many participants attempt to execute the same action at once. A security may trade frequently during ordinary conditions but attract few bids in a period of market anxiety. A fund that promises frequent redemptions may own assets that take much longer to sell without a price concession. Collateral calls can force additional sales even where the underlying investment thesis has not fundamentally changed.
Financial firms can reduce this vulnerability through realistic liquidity buffers, redemption terms suited to asset liquidity, stress testing and contingency arrangements. But none of these tools is cost-free. Holding more cash may reduce returns; restricting withdrawals affects investor flexibility; hedging can become expensive. The right design requires honest trade-offs rather than a universal numerical target. Supervisors also need to examine common exposures because individually sensible responses can intensify a market-wide sell-off when everyone tries to reduce risk together.
Where market pricing and valuation meet
A liquid public bond has an observable market price, even if that price changes sharply. Privately negotiated credit often depends on valuation models, borrower information and transactions in comparable instruments. A smooth valuation history can reflect the timing of measurement rather than an absence of volatility. That creates a challenge for investment committees comparing returns across public and private assets.
Decision-makers should ask whether valuations incorporate current borrowing costs, deteriorating borrower prospects and realistic recovery assumptions. They should understand who approves valuation changes, what happens when an asset is restructured and how a position might be sold in a stressed market. External verification and transparent methods can strengthen confidence, although they cannot turn estimates into guaranteed exit prices. For investors, the essential distinction is between a contractual payment stream, an estimated carrying value and the amount another buyer would actually pay today.
The implications for corporate borrowers
The expansion of nonbank lending affects companies as well as investors. A borrower may obtain faster decisions, customized covenants or a facility that traditional banks are reluctant to provide. Financing diversity can be particularly valuable during a period of changing monetary policy. However, financing that looks flexible at inception may contain expensive protections for the lender, restrictions on future borrowing or complex refinancing conditions.
Boards should compare the entire financing package: effective cost, covenant headroom, security, repayment profile, information obligations and the risk of a lender changing its strategy. They should also consider whether simultaneous problems at several financing partners could narrow access to new credit. The objective is not to prefer bank or nonbank finance categorically. It is to avoid substituting a familiar lender logo or an attractive headline rate for a careful assessment of how funding works through the economic cycle.
A supervisory agenda shaped by interconnectedness
A resilient system requires oversight that reflects activities and connections, while recognising the different purposes of banks, insurers and funds. Better data can reveal leverage and concentrated exposures without assuming that identical requirements are appropriate for every business model. Cross-border cooperation matters because counterparties and investment vehicles often operate in several jurisdictions.
The IMF has warned that pressure in sovereign bond markets, stretched valuations and the rising role of nonbanks can interact with broader financial vulnerabilities [3]. The Basel Committee's supervisory principles also expect banks to identify material operational and financial risks arising from their wider business environment [4]. Supervisory information should be used to test plausible chains of stress: which counterparties could demand cash, which assets could become difficult to sell, and where a problem would move next. The value of the exercise is practical preparation rather than a prediction of precisely when markets will be volatile.
What boards should ask about indirect exposure
An investment or banking board can convert the discussion into an exposure map. Begin with direct claims against funds and finance companies, then examine credit lines, collateral financing, derivatives and the deposits those entities place with the bank. Identify the asset classes that support several apparently separate positions. A decline in the same collateral type can create pressure through multiple channels at once, even if the immediate counterparties are different. Reporting should distinguish a contractual claim from the broader economic exposure that may drive repayment under stress.
Boards should also scrutinise liquidity assumptions. How many counterparties could draw committed facilities at the same time? Which assets could be sold without relying on normal market turnover? What happens if transaction data arrives late or valuation estimates are challenged? Exercises can combine a market-price shock with a cyber or operational disruption, since financial stress rarely arrives in a convenient sequence.
There is a strategic opportunity alongside the risk. Institutions that understand the full financing network may price credit more accurately, design facilities that suit client funding needs and identify vulnerable concentrations sooner. More granular information can also distinguish genuinely diverse sources of capital from exposures that depend on the same leverage and liquidity cycle. The purpose of mapping is not to retreat from financial innovation, but to make its interconnected costs and benefits legible to decision-makers.
The central question for 2027 and beyond
Nonbank financial intermediation is now a permanent feature of global capital allocation. Its growth can deepen markets, channel savings into productive investment and broaden financing choice. The risk arises when those benefits are pursued without sufficient understanding of liquidity, leverage, valuation and reliance on banking services. The next test is likely to be about connections rather than a single institution acting alone.
For financial executives, the immediate priority is to make those connections visible. That means understanding who ultimately funds an exposure, the assumptions embedded in its valuation and the operational paths through which cash or collateral must move. Better information cannot remove market cycles, and regulation cannot ensure that all investments succeed. It can, however, reduce the chance that a manageable shock becomes a larger problem because important dependencies remained hidden.
References
1. FSB, Global Monitoring Report on Nonbank Financial Intermediation 2025. Source link
2. FSB, Nonbank Finance Grows to $256.8 Trillion. Source link
3. IMF, Global Financial Stability Report, October 2025. Source link
4. BIS, Core Principles for Effective Banking Supervision. Source link