Water in the Wine? Monetary Policy and the Impact of Non-bank Financial Intermediaries
Why this work is in the frame
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Bibliographic record
Abstract
Canada was lauded for surviving the 2007-08 global financial crisis relatively unscathed. In part, this was due to the success of our financial services sector. This resilience, especially in contrast to the US banking sector, is partly explained by the smaller size of the non-bank financial intermediation (NBFI) sector in Canada – more popularly known as “shadow banking.” But signs of robust growth in Canada’s NBFI sector after the crisis suggest this resilience might be under threat. The assets of those institutions engaged in non-bank financial intermediation have continued to grow in Canada since the global financial crisis, and now account for a larger share of total financial assets than prior to the crisis. A more important NBFI sector has multiple effects on the financial system and on the economy. On the one hand, intermediaries in the sector, or NBFIs, provide alternatives for both depositors and borrowers that improve the functioning of the economy by increasing competition. On the other hand, they also might increase vulnerabilities, since they are often not as closely regulated, and deposit insurance does not cover their liabilities. We find that, as NBFI deposit growth increases in importance, it can dilute the effectiveness of monetary policy. This drag might be the result of depositors shifting between NBFIs and traditional banks, an effect that is exacerbated as the NBFI sector grows. We also find that contractionary monetary policy causes an increase in business credit growth for NBFIs and a fall in chartered bank business loan growth. Although the overall effect on business credit growth is the desired decrease, the increase in NBFI business loans both decreases monetary policy effectiveness and results in a riskier composition. Lastly, we find the insignificant effect on overall mortgage credit growth following a contractionary monetary policy shock appears to be driven by a shift of credit from traditional banks to NBFIs, and could be a concern from a financial stability perspective. Overall, these results highlight the importance of a growing NBFI sector for monetary policy and financial stability. Our findings suggest that both the traditional monetary policy tool of the overnight rate and tightening mortgage underwriting standards through macroprudential policy might have the unintended side effect of increasing financial instability. One way to reduce this potential side effect is to limit the migration of loans between traditional banks and NBFIs by tightening regulation of NBFIs to level the playing field between the two types of financial institutions. At a minimum, the systemically important NBFIs should face capital requirements and underwriting standards similar to those imposed on traditional banks. We hope these results help the Bank of Canada as it continues to evaluate and model the evolution of monetary policy transmission in the Canadian economy. To that end, NBFIs should be front and centre when the four coordinating bodies that provide systemic financial services oversight next meet.
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Full frame distilled prediction
Teacher imitationNot calibrated prevalence, not ground truth. Human validation pending. Learned from the 10,348 direct Codex labels and 10,348 direct Gemma labels. Candidate is the union of thresholded teacher heads; consensus is their intersection. These outputs are machine_predicted_unvalidated and are not human labels or direct frontier model labels.
Codex and Gemma teacher scores by category
| Category | Codex | Gemma |
|---|---|---|
| Metaresearch | 0.001 | 0.000 |
| Meta-epidemiology (narrow) | 0.000 | 0.000 |
| Meta-epidemiology (broad) | 0.000 | 0.000 |
| Bibliometrics | 0.000 | 0.000 |
| Science and technology studies | 0.000 | 0.001 |
| Scholarly communication | 0.000 | 0.000 |
| Open science | 0.000 | 0.000 |
| Research integrity | 0.000 | 0.000 |
| Insufficient payload (model declined to judge) | 0.000 | 0.000 |
Machine scores (provisional)
The two teacher heads of the student model, read on this work. A score orders the frame for review; it never asserts a category, and the validation status ships verbatim with every row.
Baseline scores from an immature model (maturity gate not passed, 7 training rounds). Scores rank; they never assert a category.
score_only:v0-immature-baseline · verbatim from the scoring run: score_only means the number may rank works, and no category label ships from it