15 June 2016

ECB: The role of euro area non-monetary financial institutions in financial intermediation

The rising role of non-MFIs that are subject to less regulation and supervision has to be assessed for its possible repercussions on monetary policy transmission. In addition, the interplay of all financial intermediaries needs to be monitored from a monetary policy perspective.

With euro area banks cutting back the supply of credit in the wake of the global financial and the euro area sovereign debt crises, the role played by the non-MFI sectors in financial intermediation has increased and has helped to mitigate the effects of the crises on the euro area economy.

This trend was facilitated by very low interest rates leading to a search for yield by investors, structural factors, such as an ageing population in the euro area, and some scope for regulatory arbitrage. In this environment, non-MMF IFs and ICPFs have been particularly prominent in increasing their role in euro area financial intermediation in recent years. As large holders of debt securities and equity, these entities have provided a significant amount of financing to the real economy, although not exclusively to the benefit of the euro area, as they are generally holders of globally diversified portfolios.

Among other OFIs, venture capital corporations are likely to have profited from a search for yield, while the activities of financing SPEs are often related to tax arbitrage by sponsoring corporations. These developments have implications for monetary policy transmission.

As Section 2 has shown, the channels of monetary policy transmission to the real economy apply – in different forms – to MFIs and non-MFIs alike. However, differences in the business models between these two groups of euro area financial intermediaries, also reflected in terms of regulation and supervision, imply that the generally larger role for non-MFIs may speed up the – indirect – transmission of monetary policy.

The increased role of non-MFIs calls for a more integrated analysis of the interplay between different financial intermediaries and transmission channels that complement or substitute the traditional bank lending and interest rate channels. As regards individual sectors among non-MFIs, non-MMF IFs and ICPFs may have less significant implications for monetary policy transmission. Like MFIs, they are subject to regulation and supervision, implying that impulses from monetary policy are likely to find their way to the real economy in a manner similar to MFIs, albeit via different channels. By contrast, the same is not necessarily true for the other OFI sector.

As some other OFIs are not subject to the same level of scrutiny as banks, they warrant special monitoring, because the financing they provide has the potential to be of a more cyclical nature, with implications for the stability of monetary policy transmission. However, specifically in this corner of the euro area financial system, data are scarce, although longer time series and new statistics, such as the "who-to-whom" data presented in Box 2 of this article, may remedy some of these shortcomings in the future.

Full publication

© ECB - European Central Bank