The combination of interest rates being stuck at zero per cent for years and a credit crunch at some point in the cycle created the ideal conditions for financing and investment outside the banking sector to flourish. In fact, the expansion of the non-banking financial sector has far outpaced the growth of the banking business over the last decade in both Spain and Europe. This has not gone unnoticed by regulators, as the phenomenon poses clear challenges to financial stability.
In Spain, this activity already accounts for 33.8% of the financial system’s total assets, although this figure remains far below the 59.9% represented by the non-banking financial sector in the euro area. According to data from the Bank of Spain, at the end of 2024 the total unconsolidated assets of banks and the non-banking financial sector in the domestic market amounted to €3.09 trillion and €1.58 trillion respectively.
In the euro area as a whole, these figures were €38.56 trillion and €57.49 trillion for the banking and non-banking sectors, respectively. However, what is particularly significant about this phenomenon is the pace at which it is advancing. While total assets managed by banks in Spain grew by almost 10% between 2015 and 2024, those channelled through the non-banking sector increased by around 25% — more than double.
According to the latest Financial Stability Report published by the Bank of Spain, the increase was 30% and 40% respectively over the last decade in the eurozone.
The term ‘non-banking’ encompasses ‘shadow banking’, which is not subject to the strict requirements imposed on financial institutions, as well as a long list of regulated and supervised operators, including insurance companies, pension funds, money market and non-money market funds, credit institutions, securitisation funds, and securities companies and agencies. This also covers the activities of venture capital companies, SOCIMIs, payment institutions, appraisers, and instrumental subsidiaries that issue securities.
In its latest annual report for 2024, the ECB acknowledges that the non-banking sector (IFNB) maintained its resilience to market volatility and supported market financing across all credit risk categories in the euro area. However, the report also notes that ‘vulnerabilities related to exposure concentration, liquidity mismatches, and high leverage in certain areas of the investment fund sector continue to be a cause for concern’.
Among the risks it monitors are sharp changes in valuations, which could lead to sudden fund outflows and margin calls, amplifying adverse market dynamics and causing spillover effects to other parts of the financial system.
According to the Financial Times, EU regulators are planning the first stress test to identify vulnerabilities in the non-bank financial system in the event of a worsening market crisis. This would include private equity firms, hedge funds, money market funds, insurers and pension funds, following a similar exercise carried out by the Bank of England last year.
The aim is to examine how a crisis would spread among the different parts of the financial system, and whether it could magnify the impact rather than absorb it.
Original Story: El Economista | Author: Eva Contreras
Edition and translation: Prime Yield