Shadow Banking and Non-Bank Financial Intermediation: Systemic Risks and the Imperative for Comprehensive Reform

The evolution of shadow banking and non-bank financial intermediation represents one of the most significant structural transformations in global finance since the aftermath of the 2008 financial crisis. What began as a regulatory response to contain risks within the traditional banking sector has inadvertently catalyzed the migration of financial activities into less regulated spheres, creating new forms of systemic vulnerability that challenge conventional approaches to financial oversight and stability maintenance. As reported by Yahoo Finance, the rapid growth of this parallel financial system continues to attract heightened scrutiny from global regulators.

Non-bank financial intermediation encompasses a vast ecosystem of institutions, activities, and market structures that perform bank-like functions while operating outside the traditional regulatory perimeter designed for deposit-taking institutions. This sector includes money market funds, hedge funds, private equity firms, insurance companies, pension funds, real estate investment trusts, securitization vehicles, and a multitude of other entities that collectively channel trillions of dollars through global financial markets.

The significance of this transformation extends far beyond mere regulatory arbitrage or market evolution. The non-bank financial intermediation sector now represents approximately half of global financial assets, fundamentally altering the mechanics of credit creation, liquidity provision, and risk distribution throughout the financial system. This structural shift has profound implications for monetary policy transmission, financial stability, and the effectiveness of traditional regulatory frameworks designed for a bank-centric financial architecture.

The COVID-19 pandemic served as a stark reminder of the vulnerabilities inherent in this transformed financial landscape. The March turmoil of the early pandemic period exposed critical weaknesses in non-bank financial intermediation that required unprecedented central bank intervention to prevent systemic collapse. These events demonstrated that the migration of financial activities from banks to non-banks has not eliminated systemic risks but has instead transformed their nature, location, and transmission mechanisms in ways that existing regulatory frameworks struggle to address effectively.

Understanding the complexities of modern shadow banking requires moving beyond simplistic narratives of regulatory evasion to examine the genuine economic functions these institutions serve, the legitimate market needs they address, and the ways in which their activities have become integral to the functioning of global financial markets. However, this analysis must also confront the uncomfortable reality that the current trajectory of non-bank financial intermediation poses significant risks to financial stability that demand comprehensive policy responses.

The Architecture of Modern Non-Bank Financial Intermediation

The contemporary non-bank financial intermediation sector operates through a complex web of interconnected institutions and markets that perform traditional banking functions through alternative structures and mechanisms. Unlike traditional banks that rely on deposit funding and direct lending relationships, non-bank financial intermediaries typically engage in credit intermediation through market-based mechanisms that involve multiple layers of entities, contracts, and risk transfer arrangements.

Money market funds exemplify the complexity of modern non-bank intermediation by performing functions similar to demand deposits while operating through fundamentally different legal and economic structures. These funds collect short-term investments from corporate and individual investors and deploy these funds in short-term, highly liquid instruments including commercial paper, certificates of deposit, and government securities. The promise of daily liquidity and stable net asset values creates bank-like characteristics while the underlying business model relies on market funding and market-based asset pricing.

Investment funds more broadly represent another critical component of the non-bank financial intermediation ecosystem, channeling savings from millions of individual and institutional investors into corporate credit markets, real estate, and other productive investments. Open-ended funds, in particular, combine pooled investment structures with liquidity promises that create potential mismatches between the liquidity characteristics of fund assets and the redemption expectations of fund investors.

Hedge funds and other leveraged investment vehicles add additional complexity to the non-bank financial intermediation landscape through their use of borrowed funds to amplify investment positions and their reliance on short-term funding arrangements that can rapidly withdraw in periods of market stress. These entities often serve as important liquidity providers in various markets while simultaneously creating potential sources of procyclical selling pressure when market conditions deteriorate.

The securitization machinery that packages loans and other cash-generating assets into tradeable securities represents perhaps the most sophisticated example of non-bank financial intermediation, involving multiple specialized entities including originators, sponsors, servicers, credit rating agencies, and a diverse array of investors with different risk appetites and return requirements. This process transforms illiquid loans into liquid securities while distributing credit risk across multiple parties and markets, increasingly facilitated by innovative hyperliquid trading platform solutions that provide enhanced liquidity and automated market-making capabilities for complex structured products and alternative investment instruments.

Insurance companies and pension funds, while subject to their own regulatory frameworks, increasingly participate in non-bank financial intermediation through their investment activities, particularly in alternative investments including private credit, real estate, and infrastructure financing. These institutions bring long-term investment horizons and substantial asset bases to non-bank financial markets while also creating new forms of interconnectedness and risk concentration.

The infrastructure supporting non-bank financial intermediation includes prime brokerage services, securities lending markets, repurchase agreement markets, and various forms of collateral management services that enable the efficient operation of non-bank entities while creating complex webs of interdependence that can rapidly transmit stress throughout the financial system.

Systemic Risk Characteristics and Transmission Mechanisms

The systemic risks associated with non-bank financial intermediation differ fundamentally from traditional banking risks in their sources, characteristics, and transmission mechanisms, requiring new analytical frameworks and policy approaches to understand and manage effectively. These risks emerge not from the failure of individual institutions but from the collective behavior of multiple entities operating under similar business models and facing similar constraints during periods of market stress.

Maturity and liquidity transformation remains a central source of systemic risk in non-bank financial intermediation, occurring through different mechanisms than traditional banking but with potentially similar or greater systemic consequences. Open-ended investment funds that invest in illiquid assets while promising daily redemption create liquidity mismatches that can force procyclical asset sales during periods of investor redemptions. These sales can depress asset prices across markets, triggering additional redemptions and creating self-reinforcing cycles of selling pressure.

Leverage amplifies these dynamics by increasing the sensitivity of non-bank financial intermediaries to market movements and by creating threshold effects where relatively small market moves can trigger large-scale deleveraging. Unlike bank leverage, which is primarily funded through deposits and subject to regulatory capital requirements, non-bank leverage often operates through derivatives, securities financing transactions, and other market-based mechanisms that can rapidly adjust to changing risk perceptions.

Interconnectedness within the non-bank financial intermediation sector creates multiple channels through which stress can propagate across institutions and markets. Direct counterparty exposures, common asset holdings, similar trading strategies, and shared funding sources all contribute to systemic vulnerabilities that can cause localized stress to spread rapidly throughout the financial system. The complexity of these interconnections often makes it difficult for individual institutions to assess their true exposure to systemic events.

Procyclical behavior represents another key dimension of systemic risk in non-bank financial intermediation, as business models and risk management practices that appear prudent at the individual institution level can create destabilizing dynamics when adopted widely across the sector. Risk-parity strategies, for example, require selling assets as volatility increases, creating selling pressure precisely when markets are most vulnerable to additional stress.

The reliance on short-term funding markets creates vulnerability to sudden stops in funding availability, particularly for institutions that depend on repurchase agreements, commercial paper, or other market-based funding sources. Unlike bank deposits, which benefit from explicit deposit insurance and central bank lender-of-last-resort facilities, non-bank funding can evaporate rapidly when investor confidence deteriorates, forcing fire sales of assets to meet funding obligations.

Credit intermediation chains that span multiple institutions and markets create risks that no single regulator or institution can fully monitor or control. A disruption at any point in these chains can cascade through multiple institutions and markets, potentially affecting credit availability to the real economy in ways that are difficult to predict or contain through traditional policy tools.

The transformation of credit risk through securitization and other structured finance techniques can obscure the true location and concentration of risks while creating new forms of complexity that challenge traditional risk management approaches. The COVID-19 pandemic demonstrated how apparently unrelated market disruptions can quickly propagate through these complex structures, affecting institutions and markets that seemed far removed from the original source of stress.

Regulatory Arbitrage and the Migration of Financial Activity

The phenomenon of regulatory arbitrage has played a central role in the growth and evolution of non-bank financial intermediation, as financial activities migrate from heavily regulated banking sectors to less regulated or unregulated alternatives that can perform similar economic functions while avoiding costly regulatory requirements. This migration reflects both the natural evolution of financial markets and the unintended consequences of regulatory frameworks designed for a different financial landscape.

Post-crisis banking regulations significantly increased the cost and complexity of traditional banking activities through enhanced capital requirements, liquidity standards, leverage ratios, and other prudential measures designed to improve bank resilience. While these reforms successfully strengthened the banking sector, they also created incentives for financial activities to migrate to non-bank alternatives that could provide similar services without bearing the full cost of banking regulation.

The securitization process exemplifies sophisticated regulatory arbitrage, allowing banks to originate loans and transfer credit risk to non-bank investors while maintaining fee income from origination and servicing activities. This structure enables banks to continue participating in credit markets while reducing their regulatory capital requirements and balance sheet constraints. However, the transfer of credit risk to less regulated entities can create new concentrations of risk and vulnerabilities that existing regulatory frameworks struggle to monitor or control.

Money market funds emerged partly as alternatives to bank deposits, offering similar liquidity and safety characteristics while operating outside the deposit insurance system and banking regulation. These funds could offer slightly higher yields than insured deposits by investing in riskier assets and by not bearing the costs of deposit insurance premiums and banking supervision. However, the absence of explicit government backing made these funds vulnerable to runs during periods of stress, requiring emergency government intervention to prevent systemic collapse.

Investment funds and other collective investment vehicles allow investors to access credit markets and other investments without direct regulatory oversight of their investment decisions, while the funds themselves operate under regulatory frameworks designed for investor protection rather than systemic risk management. This structure can concentrate large amounts of credit risk in entities that lack the capital buffers and liquidity facilities available to banks, creating potential vulnerabilities during stress periods.

Private credit markets have grown substantially as banks have reduced their involvement in certain types of lending due to regulatory constraints and competitive pressures. While this growth has maintained credit availability to borrowers, it has also concentrated credit risk in less regulated entities that may lack the diversification, risk management capabilities, and loss absorption capacity of traditional banks.

The growth of market-based finance has created new forms of interconnectedness between banks and non-banks that can transmit stress between sectors in complex ways. Banks provide various services to non-bank financial intermediaries including prime brokerage, custody, and liquidity facilities, creating channels through which stress in non-bank sectors can affect banks and vice versa. These interconnections can undermine the intended benefits of regulatory arbitrage by reintroducing systemic risks through alternative channels.

Regulatory arbitrage also occurs across jurisdictions, as financial activities migrate to locations with more favorable regulatory treatment. This international dimension of regulatory arbitrage can create races to the bottom in regulatory standards and can undermine the effectiveness of national regulatory frameworks when financial activities can easily relocate to avoid regulatory requirements.

The challenge for policymakers is distinguishing between beneficial financial innovation that improves market efficiency and provides genuine economic value, and regulatory arbitrage that simply relocates risks without reducing them or that creates new systemic vulnerabilities. This distinction requires nuanced analysis of the economic functions performed by different non-bank financial intermediation activities and their implications for overall financial system resilience.

Lessons from the March Turmoil and Pandemic Response

The market disruptions of March during the early stages of the COVID-19 pandemic provided unprecedented insights into the vulnerabilities of modern non-bank financial intermediation and highlighted the ways in which these vulnerabilities can quickly threaten broader financial stability. The speed and severity of the disruptions caught many observers by surprise and demonstrated that stress transmission mechanisms in the current financial system can operate much more rapidly than traditional models suggested.

The crisis began with the recognition that the pandemic would cause significant economic disruption, leading to a broad reassessment of credit risks and investment positions across financial markets. However, the initial credit concerns quickly evolved into a broader liquidity crisis as investors sought to raise cash and reduce risk exposures, creating selling pressure across multiple asset classes simultaneously.

Money market funds experienced severe stress as investors sought to redeem shares while the funds faced difficulties selling assets to meet redemption requests. Prime money market funds, which invest in commercial paper and other private sector obligations, were particularly affected as spreads widened dramatically and liquidity in short-term funding markets evaporated. The Federal Reserve ultimately had to reactivate emergency lending facilities from the 2008 financial crisis and create new facilities to support money market fund liquidity and restore functioning to short-term funding markets.

Open-ended investment funds faced similar challenges as investors sought to redeem investments while fund managers struggled to sell assets in increasingly illiquid markets. Corporate bond funds, emerging market funds, and other investment vehicles experienced massive outflows that forced managers to sell assets at depressed prices, creating downward pressure on asset values that affected the entire investor base. Many funds suspended redemptions or imposed liquidity fees to manage the mismatch between investor redemption requests and asset liquidity.

The repo market, which provides crucial short-term funding for many financial institutions, experienced severe stress as market participants hoarded cash and demanded higher margins for lending against collateral. This stress affected not only the direct participants in repo markets but also the broader range of institutions that depend on repo funding for their operations, including hedge funds, broker-dealers, and other leveraged investors.

Treasury markets, traditionally viewed as the deepest and most liquid in the world, experienced unprecedented dysfunction as selling pressure from multiple sources overwhelmed market-making capacity. The combination of massive selling by leveraged investors, reduced dealer capacity due to balance sheet constraints, and increased demand for cash created conditions where even U.S. government securities became difficult to trade efficiently.

International spillovers amplified the crisis as dollar funding stress affected institutions worldwide, requiring coordinated central bank action through swap lines and other mechanisms to prevent a global liquidity crisis. The interconnected nature of global financial markets meant that stress in U.S. markets quickly transmitted to other jurisdictions, affecting institutions and markets that had no direct exposure to the original sources of stress.

The unprecedented policy response required to contain the March turmoil included emergency lending facilities, asset purchase programs, and other measures that went far beyond traditional monetary policy tools. Central banks effectively became market makers of last resort in multiple markets, demonstrating both the severity of the vulnerabilities and the extent to which non-bank financial intermediation had become systemically important.

The recovery from the March turmoil was swift once central bank intervention restored market functioning, but the episode highlighted fundamental vulnerabilities in the structure of modern financial markets that remain largely unaddressed. The continued reliance on central bank intervention to maintain market stability during stress periods raises important questions about the sustainability of current market structures and the appropriate division of risks between private markets and public institutions.

The International Dimension and Cross-Border Spillovers

The global nature of non-bank financial intermediation creates complex cross-border dynamics that can rapidly transmit financial stress across jurisdictions while challenging the effectiveness of national regulatory frameworks designed for primarily domestic institutions. The interconnectedness of global financial markets means that vulnerabilities in one jurisdiction can quickly affect institutions and markets worldwide, requiring unprecedented levels of international coordination to manage effectively.

Dollar funding markets represent a critical channel for international stress transmission, as non-U.S. institutions that borrow in dollars or invest in dollar-denominated assets can face severe funding constraints when dollar liquidity becomes scarce. The March turmoil demonstrated how stress in U.S. markets can quickly create dollar funding shortages for institutions worldwide, requiring coordinated central bank action through swap lines and other mechanisms to prevent a global financial crisis.

Cross-border investment flows amplify international spillovers as investors seeking to reduce risk or raise liquidity sell assets across multiple jurisdictions simultaneously. Investment funds with global portfolios can transmit stress from one market to another through their selling activities, while the correlation of selling pressure across markets can reduce the diversification benefits that investors expect from international investments.

Regulatory arbitrage operates on an international scale as financial activities migrate not only from regulated to less regulated sectors within jurisdictions but also from jurisdictions with stricter regulation to those with more permissive frameworks. This international regulatory arbitrage can undermine the effectiveness of national regulatory measures and can create races to the bottom in regulatory standards as jurisdictions compete to attract financial activity.

The complexity of international legal and regulatory frameworks creates challenges for managing cross-border non-bank financial intermediation effectively. Different jurisdictions have varying approaches to regulating similar activities, creating potential gaps in oversight and making it difficult to assess and manage risks that span multiple legal systems.

International financial institutions increasingly operate through complex global structures that can make it difficult to determine the location of risks and the applicable regulatory authority. A single institution may have operations in dozens of jurisdictions with different regulatory requirements, creating compliance challenges and potential conflicts between different regulatory frameworks.

The resolution of failing international financial institutions creates particular challenges when activities span multiple jurisdictions with different insolvency laws and resolution frameworks. The absence of comprehensive international resolution frameworks for non-bank financial intermediaries means that the failure of a large international institution could create legal and operational complications that amplify systemic risks.

Currency hedging and derivatives markets create additional channels for international risk transmission as institutions seek to manage foreign exchange and other market risks. Disruptions in these markets can affect institutions worldwide that rely on hedging strategies to manage their risk exposures, potentially forcing widespread position adjustments when hedging becomes expensive or unavailable.

The role of international financial centers as hubs for global non-bank financial intermediation creates concentrations of activity that can become sources of systemic risk for the global financial system. Market disruptions in major financial centers can have worldwide implications due to the concentration of trading, funding, and other critical financial activities in these locations.

International coordination of regulatory and supervisory activities becomes essential but faces significant practical and political challenges. Different jurisdictions have varying approaches to regulation, different economic priorities, and different political constraints that can make it difficult to achieve consistent approaches to managing global non-bank financial intermediation risks.

Policy Frameworks and Regulatory Challenges

The development of effective policy frameworks for non-bank financial intermediation requires fundamental rethinking of traditional regulatory approaches designed for bank-centric financial systems. The diversity of non-bank financial intermediation activities, the complexity of their interconnections, and the speed at which risks can materialize and propagate create challenges that exceed the capacity of conventional prudential regulation designed for individual institutions.

Activity-based regulation emerges as a crucial complement to entity-based regulation, focusing on the economic functions performed rather than the legal form of the institutions performing them. This approach recognizes that similar economic functions can create similar risks regardless of the institutional structure through which they are performed, requiring similar regulatory treatment to prevent regulatory arbitrage and ensure comprehensive risk management.

Macroprudential policy tools designed specifically for non-bank financial intermediation represent an important innovation in regulatory thinking, moving beyond traditional microprudential approaches that focus on individual institution safety and soundness toward system-wide measures that address collective risks and behaviors. These tools might include system-wide liquidity requirements, limits on leverage or maturity transformation, or measures to reduce procyclical behavior across the non-bank financial intermediation sector.

The challenge of calibrating regulatory measures for non-bank financial intermediation involves balancing the benefits of financial innovation and market-based finance against the risks to financial stability. Overly restrictive regulation could drive financial activities into even less regulated areas or could reduce the efficiency benefits that non-bank financial intermediation provides to the economy. However, insufficient regulation could allow systemic risks to build to dangerous levels.

Data collection and monitoring capabilities require substantial enhancement to keep pace with the complexity and rapid evolution of non-bank financial intermediation. Traditional supervisory tools designed for banks may be inadequate for understanding risks in market-based finance, requiring new approaches to data collection, risk assessment, and supervisory intervention.

The development of resolution frameworks for systemically important non-bank financial intermediaries presents unique challenges due to their market-based business models and the potential for rapid contagion effects. Traditional bank resolution tools may be inappropriate for institutions that rely on market confidence and short-term funding, requiring new approaches that can address failing institutions without destabilizing broader markets.

International coordination becomes essential given the global nature of many non-bank financial intermediation activities, but achieving effective coordination faces significant obstacles including differences in regulatory philosophies, institutional structures, and political priorities across jurisdictions. The development of international standards and best practices for non-bank financial intermediation regulation represents a crucial but challenging priority for international financial institutions and standard-setting bodies.

The integration of non-bank financial intermediation oversight into broader financial stability frameworks requires new institutional arrangements and capabilities that can monitor system-wide risks and coordinate responses across multiple regulatory agencies and jurisdictions. Traditional regulatory structures based on sectoral supervision may be inadequate for addressing risks that span multiple sectors and activities.

Market Structure Reform and Resilience Building

The imperative for comprehensive market structure reform in non-bank financial intermediation extends beyond traditional regulatory approaches to encompass fundamental changes in how markets operate, how institutions manage liquidity, and how the financial system as a whole responds to stress. These reforms must address the underlying structural vulnerabilities that make non-bank financial intermediation susceptible to rapid contagion while preserving the legitimate economic benefits that market-based finance provides.

Liquidity management frameworks for non-bank financial intermediaries require substantial enhancement to address the fundamental mismatches between asset liquidity and liability characteristics that create vulnerability to runs and fire sales. Investment funds, in particular, need more sophisticated approaches to managing liquidity risk that go beyond traditional measures of asset liquidity to consider the interaction between investor behavior, market conditions, and fund-specific characteristics.

The development of robust backstop facilities for non-bank financial intermediation represents a critical but controversial area of reform. While central bank lending facilities can prevent liquidity crises from becoming solvency crises, they also create moral hazard by reducing incentives for private risk management and can expose taxpayers to losses from private sector risk-taking. The design of appropriate backstop facilities requires careful balance between financial stability objectives and moral hazard concerns.

Market making and intermediation capacity in key markets needs strengthening to reduce the vulnerability of markets to disruptions when primary dealers and other market makers face balance sheet constraints. The March turmoil demonstrated that market making capacity can disappear precisely when it is most needed, suggesting that market structures may need fundamental changes to ensure adequate intermediation capacity during stress periods.

The development of alternative liquidity management tools including swing pricing, gates, and other measures that can help investment funds manage liquidity stress without resorting to fire sales represents an important area of innovation. These tools need to be designed and implemented in ways that provide effective protection during stress while not unduly restricting normal market functioning or investor access to their investments.

Margin and collateral practices in securities financing markets require reform to reduce procyclical effects that can amplify market stress. Current practices that increase margin requirements and reduce acceptable collateral during stress periods can force deleveraging precisely when markets are most vulnerable, creating feedback loops that destabilize markets and institutions.

The infrastructure supporting non-bank financial intermediation, including clearing and settlement systems, needs enhancement to handle the volumes and volatility that can emerge during stress periods. The concentration of clearing and settlement activities in a small number of institutions creates potential bottlenecks that could amplify system-wide stress.

Transparency and disclosure requirements for non-bank financial intermediation need substantial improvement to enable market participants, regulators, and other stakeholders to understand and manage risks effectively. The complexity of many non-bank financial intermediation activities and structures creates information asymmetries that can contribute to market instability during stress periods.

The development of stress testing frameworks specifically designed for non-bank financial intermediation represents a crucial innovation in risk management, requiring new methodologies that can capture the complex interactions between market conditions, investor behavior, and institutional responses that drive system-wide stress dynamics.

Future Challenges and Emerging Risks

The landscape of non-bank financial intermediation continues to evolve rapidly, driven by technological innovation, changing investor preferences, regulatory developments, and broader economic trends that create new forms of risk and opportunity. Understanding and preparing for these emerging challenges requires forward-looking analysis that can anticipate how current trends might develop and what new vulnerabilities might emerge.

Technological disruption of financial intermediation through fintech innovations, artificial intelligence, and blockchain technologies creates both opportunities and risks for non-bank financial intermediation. While these technologies can improve efficiency and reduce costs, they also create new forms of operational risk, cyber vulnerability, and potential for rapid contagion that existing regulatory frameworks may be ill-equipped to address.

The growth of private markets and alternative investments represents a significant trend in non-bank financial intermediation that creates new concentrations of risk and complexity. As institutional investors increasingly allocate capital to private equity, private credit, real estate, and other alternative investments, these markets become more systemically important while remaining largely opaque to regulators and other market participants.

Climate change and sustainability considerations increasingly influence non-bank financial intermediation through both physical risks from climate events and transition risks from policy responses to climate change. The potential for stranded assets, sudden repricing of climate-related risks, and mandatory transitions away from carbon-intensive investments could create new sources of system-wide stress that current risk management frameworks may not adequately capture.

Demographic trends including population aging and changing retirement patterns affect the structure and risk characteristics of non-bank financial intermediation through their impact on pension funds, insurance companies, and other institutions that manage long-term savings. These trends could alter the demand for different types of investments and risk management strategies in ways that affect the overall stability of the financial system.

Geopolitical tensions and the potential fragmentation of global financial markets could fundamentally alter the international dimensions of non-bank financial intermediation, potentially reducing the benefits of international diversification while creating new channels for contagion and instability.

The potential for monetary policy normalization to reveal hidden vulnerabilities in non-bank financial intermediation remains a significant concern, particularly given the extent to which low interest rates and quantitative easing may have encouraged risk-taking and leverage that could become problematic as financial conditions tighten.

Digital currencies and central bank digital currencies could fundamentally alter the structure of financial intermediation by changing how money and payments function, potentially reducing the role of some forms of non-bank financial intermediation while creating new channels for financial innovation and risk.

The continued growth and evolution of algorithmic trading, high-frequency trading, and other automated trading strategies create new forms of market risk and potential for rapid contagion that could affect non-bank financial intermediation through their impact on market liquidity and price discovery.

The path forward for non-bank financial intermediation reform requires sustained commitment to comprehensive policy development that addresses both current vulnerabilities and emerging risks while preserving the legitimate benefits that market-based finance provides to the economy. This commitment must encompass not only regulatory and supervisory reforms but also broader changes in market structure, risk management practices, and international coordination that can build resilience into the financial system.

The stakes involved in getting this balance right are enormous, as non-bank financial intermediation now plays such a central role in global finance that its stability affects everything from pension security to corporate funding to government debt markets. The lessons learned from the March turmoil and other recent stress episodes provide valuable guidance for policy development, but they also highlight the extent to which the financial system has changed in ways that require fundamental rethinking of traditional approaches to financial regulation and supervision.

Success in managing the risks of non-bank financial intermediation while preserving its benefits will require unprecedented levels of cooperation between public and private sectors, across different regulatory agencies, and among different countries. The complexity and interconnectedness of modern financial markets mean that narrow, sectoral approaches to regulation are unlikely to be sufficient, requiring instead comprehensive, system-wide approaches that can address risks wherever they arise and however they evolve.

The ultimate goal must be a financial system that combines the efficiency and innovation benefits of market-based finance with the stability and resilience necessary to support sustainable economic growth. Achieving this goal will require continuous vigilance, adaptation, and improvement in regulatory frameworks as non-bank financial intermediation continues to evolve in response to changing economic conditions, technological developments, and policy initiatives. The alternative – allowing current vulnerabilities to persist and new risks to emerge unchecked – could ultimately undermine both financial stability and the legitimate benefits that non-bank financial intermediation provides to the global economy.