Shadow Banking / Non-Bank Financial Intermediation (NBFI) Explained: Why It's Now Half the Financial System

Shadow banking — now more often called non-bank financial intermediation, or NBFI, in official documents — is credit and financial intermediation that happens outside the traditional, deposit-taking banking system. Money market funds, hedge funds, private credit funds, insurers and pension funds, and the broker-dealers and structured finance vehicles that service them all fall under this umbrella. It sounds like a fringe topic, but according to the Financial Stability Board it is now the larger half of the global financial system by assets, which is exactly why regulators who used to focus almost entirely on banks have spent the last decade building out an entirely parallel monitoring and policy framework for it.

How big NBFI actually is now

The FSB's Global Monitoring Report on Non-Bank Financial Intermediation, covering 2024 data, put the sector at $256.8 trillion globally, up 9.4% on the year — roughly double the 4.7% growth rate of the traditional banking sector over the same period. That puts NBFI at 51% of total global financial assets, back above half for the first time since before the pandemic. Within that total, the FSB's "other financial intermediaries" category — money market funds, hedge funds, investment funds and trust companies — grew 11% to $169.4 trillion, while the narrower measure the FSB uses to capture the specific activities most similar to bank credit intermediation grew 12% to $76.3 trillion. Pension funds and insurers, which are typically lower-risk from a financial-stability perspective, grew more modestly at 7% and 6% respectively.

Why regulators care: it's not the size, it's the structure

The FSB's concern isn't simply that NBFI is large — it's that some parts of it combine the same vulnerabilities that make banks risky (credit intermediation, maturity transformation, liquidity transformation, leverage) without the same prudential backstops banks carry, like deposit insurance and lender-of-last-resort access to a central bank. The 2024 report specifically flagged that fixed income and mixed funds showed high degrees of liquidity transformation — offering investors daily redemptions while holding less liquid underlying assets — and that finance companies, broker-dealers and structured finance vehicles (including the CLO structures increasingly used to package leveraged loans) are running elevated leverage levels. The FSB was also candid about a growing blind spot: it described "severe limitations in the availability of data for private credit" as a critical monitoring gap, even as private credit has become one of the fastest-growing corners of non-bank lending.

The policy response so far

Since the G20 endorsed the original shadow banking reform agenda in 2013, the FSB has coordinated policy work across five areas: reducing spillover risk between banks and NBFI entities, making money market funds more resilient to rapid withdrawals (reforms the US and EU both adopted in different forms, discussed in our money market funds explainer), improving transparency in securitisation, dampening procyclicality in securities financing through standardised margining and haircut frameworks, and monitoring systemic risk building up in asset management and other collective investment activity more broadly. None of this is a single rule finance professionals can point to the way they might point to a capital ratio — it's a slow, ongoing programme of closing gaps as they're identified, which is part of why NBFI risk tends to surface through stress events rather than through a predictable compliance calendar.

Where this shows up in practice

For finance teams, NBFI oversight matters less as a direct compliance obligation and more as context: it explains why regulators scrutinise repo market financing arrangements so closely, why money market fund reform keeps resurfacing after episodes of market stress, and why private credit funds are facing growing calls for better disclosure even though they sit outside direct bank-style supervision. Understanding the NBFI framework is also useful shorthand for a question that comes up constantly in risk discussions: if a given activity isn't happening inside a bank, does that mean the risk has actually gone away, or just moved somewhere with less visibility attached to it?

FAQ

Is "shadow banking" a pejorative term?
It originated as a somewhat loaded term coined around the 2008 crisis, which is why the FSB and most official bodies now prefer "non-bank financial intermediation" (NBFI) — a more neutral description that doesn't imply all of the activity is inherently risky or hidden.

Does NBFI include my pension fund or insurance policy?
Technically yes — pension funds and insurance corporations are both part of the broad NBFI measure, though they are generally considered lower-risk than the "other financial intermediaries" category that includes money market funds, hedge funds and structured credit vehicles.

Why does private credit get singled out as a data gap?
Private credit loans are typically bilaterally negotiated and don't trade on public markets, so there is no centralised reporting mechanism comparable to what exists for public bonds or bank loans — making it genuinely difficult for regulators to assess how much leverage and risk is actually building up in that corner of the market.

Staying current on regulatory developments like this is part of ongoing professional development — see Learnsignal's CPD courses for structured ways to build that knowledge.

The shift of leveraged loan holdings away from bank balance sheets toward CLOs, private credit funds, and other institutional investors is one of the clearest examples of non-bank financial intermediation growth in corporate lending.

The US Volcker Rule's restriction on banks sponsoring hedge funds and private equity funds was one of several regulatory drivers that pushed this kind of activity further into the non-bank sector after 2010.