By Naoto Takemoto, Simon Jurkatis, and Nicholas Vause
In less than two decades, the system of market-based finance (MBF) – which involves mainly non-bank financial institutions (NBFIs) providing credit to the economy through bonds rather than loans – has both mitigated and amplified the economic effects of financial crises. It mitigated effects after the global financial crisis (GFC), when it substituted for banks in providing credit. But it amplified effects at the outbreak of the Covid pandemic, when NBFIs propagated a dash for cash (DFC), and more recently when pension fund gilt sales exacerbated increases in yields.
This post outlines five different aspects of MBF that contribute to such amplification and summarises some policy proposals – suggested and debated internationally by regulators, academics and market participants – to make MBF more resilient.