Non-bank financial institution

A non-bank financial institution is a financial
institution that does not have a full banking license or is not supervised by a national
or international banking regulatory agency. NBFIs facilitate bank-related financial services,
such as investment, risk pooling, contractual savings, and market brokering. Examples of these include insurance firms,
pawn shops, cashier’s check issuers, check cashing locations, payday lending, currency
exchanges, and microloan organizations. Alan Greenspan has identified the role of
NBFIs in strengthening an economy, as they provide “multiple alternatives to transform
an economy’s savings into capital investment [which] act as backup facilities should the
primary form of intermediation fail.” Role in financial system
NBFIs supplement banks by providing the infrastructure to allocate surplus resources to individuals
and companies with deficits. Additionally, NBFIs also introduces competition
in the provision of financial services. While banks may offer a set of financial services
as a packaged deal, NBFIs unbundle and tailor these service to meet the needs of specific
clients. Additionally, individual NBFIs may specialize
in one particular sector and develop an informational advantage. Through the process of unbundling, targeting,
and specializing, NBFIs enhances competition within the financial services industry. Growth
Some research suggests a high correlation between a financial development and economic
growth. Generally, a market-based financial system
has better-developed NBFIs than a bank-based system, which is conducive for economic growth. Stability
A multi-faceted financial system that includes non-bank financial institutions can protect
economies from financial shocks and enable speedy recovery when these shocks happen. NBFIs provide “multiple alternatives to
transform an economy’s savings into capital investment, [which] serve as backup facilities
should the primary form of intermediation fail.” However, in the absence of effective financial
regulations, non-bank financial institutions can actually exacerbate the fragility of the
financial system. Since not all NBFIs are heavily regulated,
the shadow banking system constituted by these institutions could wreak potential instability. In particular, CIVs, hedge funds, and structured
investment vehicles, up until the 2007-2012 global financial crisis, were entities that
focused NBFI supervision on pension funds and insurance companies, but were largely
overlooked by regulators. Because these NBFIs operate without a banking
license, in some countries their activities are largely unsupervised, both by government
regulators and credit reporting agencies. Thus, a large NBFI market share of total financial
assets can easily destabilize the entire financial system. A prime example would be the 1997 Asian financial
crisis, where a lack of NBFI regulation fueled a credit bubble and asset overheating. When the asset prices collapsed and loan defaults
skyrocketed, the resulting credit crunch led to the 1997 Asian financial crisis that left
most of Southeast Asia and Japan with devalued currencies and a rise in private debt. Due to increased competition, established
lenders are often reluctant to include NBFIs into existing credit-information sharing arrangements. Additionally, NBFIs often lack the technological
capabilities necessary to participate in information sharing networks. In general, NBFIs also contribute less information
to credit-reporting agencies than do banks. Types
Risk-pooling institutions Insurance companies underwrite economic risks
associated with illness, death, damage and other risks of loss. In return to collecting an insurance premium,
insurance companies provide a contingent promise of economic protection in the case of loss. There are two main types of insurance companies:
general insurance and life insurance. General insurance tends to be short-term,
while life insurance is a longer-term contract, which terminates at the death of the insured. Both types of insurance, life and general,
are available to all sectors of the community. Although insurance companies do not have banking
licenses, in most countries insurance has a separate form of regulation specific to
the insurance business and may well be covered by the same financial regulator that also
covers banks. There have also been a number of instances
where insurance companies and banks have merged thus creating insurance companies that do
have banking licenses. Contractual savings institutions
Contractual savings institutions give individuals the opportunity to invest in collective investment
vehicles as a fiduciary rather than a principal role. Collective investment vehicles pool resources
from individuals and firms into various financial instruments including equity, debt, and derivatives. Note that the individual holds equity in the
CIV itself rather what the CIV invests in specifically. The two most popular examples of contractual
savings institutions are pension funds and mutual funds. The two main types of mutual funds are open-end
and closed-end funds. Open-end funds generate new investments by
allowing the public to purchase new shares at any time, and shareholders can liquidate
their holding by selling the shares back to the open-end fund at the net asset value. Closed-end funds issue a fixed number of shares
in an IPO. In this case the shareholders capitalize on
the value of their assets by selling their shares in a stock exchange. Mutual funds are usually distinguished by
the nature of their investments. For example, some funds specialize in high
risk, high return investments, while others focus on tax-exempt securities. There are also mutual funds specializing in
speculative trading, a specific sector, or cross-border investments. Pension funds are mutual funds that limit
the investor’s ability to access their investments until a certain date. In return, pension funds are granted large
tax breaks in order to incentivize the working population to set aside a portion of their
current income for a later date after they exit the labor force. Market makers Market makers are broker-dealer institutions
that quote a buy and sell price and facilitate transactions for financial assets. Such assets include equities, government and
corporate debt, derivatives, and foreign currencies. After receiving an order, the market maker
immediately sells from its inventory or makes a purchase to offset the loss in inventory. The differential between the buying and selling
quotes, or the bid–offer spread, is how the market-maker makes profit. A major contribution of the market makers
is improving the liquidity of financial assets in the market. Specialized sectorial financiers
They provide a limited range of financial services to a targeted sector. For example, real estate financiers channel
capital to prospective homeowners, leasing companies provide financing for equipment
and payday lending companies that provide short term loans to individuals that are Underbanked
or have limited resources. Financial service providers
Financial service providers include brokers, management consultants, and financial advisors,
and they operate on a fee-for-service basis. Their services include: improving informational
efficiency for the investors and, in the case of brokers, offering a transactions service
by which an investor can liquidate existing assets. In Asia
According to the World Bank, approximately 30% total assets of South Korea’s financial
system was held in NBFIs as of 1997. In this report, the lack of regulation in
this area was claimed to be one reason for the 1997 Asian Financial Crisis. In the United States
In 1996, the NBFI sector accounted for approximately $200 billion in transactions in the United
States. See also
Alternative financial services Financial economics
Non-banking financial company References External links
World Bank GFDR Report

3 comments on “Non-bank financial institution”

  1. amir zahidi says:

    "Interesting" video

  2. Wolf Titan says:

    As said by Wikipedia

  3. NIKKI SAH says:

    Please change these language

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