Non-bank financial intermediation: Canada’s submission to the 2023 global monitoring report

Introduction

The global non-bank financial intermediation (NBFI) sector has grown significantly since the 2008–09 global financial crisis. In response, the Financial Stability Board (FSB) established the Non-bank Monitoring Experts Group, which collects data annually from 29 jurisdictions and produces the Global Monitoring Report on Non-Bank Financial Intermediation (GMR) (Financial Stability Board 2023). The GMR monitors growth in the NBFI sector and key subsectors across each jurisdiction.

The Bank of Canada works closely with Statistics Canada, the Ontario Securities Commission and the Office of the Superintendent of Financial Institutions to compile Canadian data for the GMR.

We share insights from data from 2002 to 2022 that the Bank has collected and submitted to the FSB for inclusion in the GMR. Although we provide context for recent developments, we do not present the Bank’s overall assessment of vulnerabilities relating to either Canadian NBFI entities or more general activity in core financial markets. The Bank’s Financial Stability Report—2024 contains the most recent assessment of vulnerabilities associated with the NBFI sector (Bank of Canada 2024).

Key insights from the data

• NBFI assets in Canada declined by 4.3% in 2022 to $12.1 trillion. This represents the:
  • largest annual decline since the Bank began tracking NBFI assets in 2002
  • first time that assets have declined since 2011
  This drop largely reflects falling asset valuations across a broad range of markets, driven by many factors, including rising interest rates.
• The share of NBFI assets in the Canadian financial system fell to 60.5% from 62.9%. This is the lowest share since 2011. This decrease in the NBFI share of the financial system was due to:
  • the decline in NBFI assets
  • an 8.5% increase in assets at deposit-taking corporations
• Assets for the narrow measure of NBFI—which includes entities that engage in bank-like activities—fell by 9.1%. About 80% of the narrow measure of NBFI consists of investment funds that invest in credit products. The assets in these funds declined by 11.8% due to decreasing prices for credit products.

Definitions of non-bank financial intermediation

We follow the definitions for NBFI entities set out in the GMR (Figure 1) (Financial Stability Board 2023, page 3). The NBFI sector is composed of all non-bank financial entities that engage in some form of financial intermediation. These include pension funds, insurance corporations, financial auxiliaries and many other intermediaries referred to collectively as other financial intermediaries (OFIs).

Figure 1: Entities in the non-bank financial intermediation sector include insurance corporations, pension funds, financial auxiliaries and other financial intermediaries

Figure 1: Entities in the non-bank financial intermediation sector include insurance corporations, pension funds, financial auxiliaries and other financial intermediaries

Note: The Financial Stability Board establishes financial entity categories. The appendix provides definitions for each entity type.

Some NBFI entities engage in bank-like activities that involve a significant amount of:

• maturity transformation
• liquidity transformation
• credit transformation

Entities that engage in these activities fall into what the FSB defines as the “narrow measure of NBFI” (Figure 2). These entities often provide a valuable alternative to traditional banking by:

• fostering innovation
• enhancing competition
• catering to underserved market segments
• promoting efficiency in the financial system

However, these activities are often associated with financial leverage and represent an important channel through which risk can spread across the financial system.

Figure 2: The narrow measure of non-bank financial institutions monitors entities that engage in bank-like activities

Figure 2: The narrow measure of non-bank financial institutions monitors entities that engage in bank-like activities

Note: The Financial Stability Board establishes narrow measure categories. Entities included in the narrow measure tend to engage in activities that involve a significant amount of maturity, liquidity and credit transformation. The appendix provides definitions for each category of the narrow measure.

Developments in the Canadian financial system and NBFI sector

Assets in the Canadian financial system declined from $20.2 trillion to $20.1 trillion between the end of 2021 and the end of 2022. This represents the first drop in 20 years and is driven by declining asset prices.

Global bond prices declined in 2022, driven by major central banks tightening policy rates to fight rising global inflation. Canadian bond markets followed this trend. For instance, the yield on 10-year Government of Canada bonds rose from 1.4% at the end of 2021 to 3.3% at the end of 2022 (Bloomberg Finance L.P. 2024).

Many other assets—notably Canadian equities—sold off as well, in anticipation of slowing growth due, in part, to policy tightening.

As a result of these trends, total assets in the Canadian financial system declined by 0.5%, which is the only decline since tracking began in 2002 (Chart 1).

Chart 1: Total assets in the Canadian financial system fell in 2022 for the first time in more than 20 years

Assets from deposit-taking institutions—mostly commercial banks and credit unions—increased by 8.5% from the end of 2021 to the end of 2022. The increased assets in deposit-taking institutions can be largely attributed to a rise in loans, which, for banks, grew by 11.3% and now make up 55.2% of assets (Office of the Superintendent of Financial Institutions 2024).

At the same time, NBFI assets decreased by 4.3%. As a result, the NBFI share of total assets in the financial system saw its largest year-over-year decline from 62.9% to 60.5%.

Declines in NBFI assets in 2022 resulted primarily from investment losses at OFIs. Chart 2 displays the growth and composition of assets held by OFIs. These assets declined by 4.7% in 2022, mainly driven by declining mutual fund assets.

Chart 2: Assets held by other financial intermediaries fell in 2022, largely driven by other investment funds

Tracking changes in the narrow measure of NBFI

Assets held by NBFI entities in the narrow measure declined by 9.1% from the end of 2021 to the end of 2022 (Chart 3). This decline was driven entirely by investment funds that invest in credit products. These funds’ assets fell by 11.8% year-over-year. These investment funds make up the majority, or about 80%, of the narrow measure of NBFI. Of the decline in investment fund assets:

• 87% was due to declines in asset valuations
• 13% was due to investor withdrawals

Chart 3: Assets held by entities in the narrow measure of non-bank financial intermediaries declined in 2022

Chart 4 shows that the most significant losses within investment funds that invest in credit products occurred in:

• fixed-income mutual funds, which declined by 12.3%
• mixed mutual funds, which declined by 15.1%

Assets in credit hedge funds and credit pooled funds experienced smaller declines.

Chart 4: Fixed-income and mixed mutual funds were responsible for a large share of investment fund losses in 2022

Finance companies are the second largest component of the narrow measure, comprising 13.8% of assets. Finance companies recorded growth in assets of 6.3% in 2022 (Chart 5) (Statistics Canada 2024).

Chart 5: Finance companies recorded asset growth of 6.3% in 2022

Conclusion

In 2022, assets in the Canadian NBFI sector declined by 4.3%, their largest percentage decline since the Bank began tracking in 2002. The decline was largely fuelled by falling asset valuations across a broad range of markets, which was driven by many factors, including rising interest rates. As a result, the share of NBFI assets in the Canadian financial system also dropped to 60.5%—its lowest level since 2002. In 2022, the narrow measure of NBFI saw its assets decline by 8.9%. This decrease was driven entirely by investment funds that invest in credit products, whose assets fell by 11.8% year-over-year.

Appendix

References

Bank of Canada. 2024. “Financial Stability Report—2024.”

Bloomberg Finance L.P. 2024. “Canada 10-Year Index.” Line chart from 12/31/2021 to 12/31/2022. Bloomberg Terminal. Accessed May 1, 2024.

Financial Stability Board. 2023. “Global Monitoring Report on Non-Bank Financial Intermediation: 2023.”

Office of the Superintendent of Financial Institutions. 2024. “Financial Data for Banks.” Last modified January 18.

Statistics Canada. 2024. “Non-Bank Financial Intermediation, 2007 to 2022.” The Daily, February.

Acknowledgements

We thank Statistics Canada, the Ontario Securities Commission and the Office of the Superintendent of Financial Institutions for their expertise and contributions.