IMF: Banking on Nonbanks - How Regulatory Shifts Drive Intra-Group Credit Reallocation
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The IMF Working Paper Banking on Nonbanks mentions that banking groups strategically adjust their corporate credit supply by reallocating lending from bank subsidiaries to affiliated nonbank financial institutions (NBFIs) in response to tighter macroprudential policies . Using granular data on global syndicated corporate loans from 2005 to 2023, the study reveals that while bank subsidiaries contract lending by 1.0 percent following a one-standard deviation regulatory tightening, affiliated NBFI subsidiaries—which often fall outside the full regulatory perimeter—expand their credit supply by 1.0 percent in absolute terms. This “banking on nonbanks” strategy allows banking groups to offset, on average, more than half of the contraction in bank lending induced by macroprudential tightening.
Pillars of Intra-Group Credit Substitution The research identifies several strategic pillars that facilitate this internal reallocation of credit within complex financial conglomerates:
Regulatory Asymmetry and Perimeter Gaps: While commercial banks face stringent capital, liquidity, and stress-testing requirements, their nonbank affiliates—such as broker-dealers and investment banks—typically operate under lighter prudential oversight. This allows banking groups to shift high-value exposures like syndicated loans to less-regulated entities within the same group.
Internal Capital Market Subsidization: Parent banks utilize their internal capital markets to reallocate funding, potentially at preferential terms, to their NBFI subsidiaries. This enables nonbank affiliates to sustain and even expand lending activity when the parent’s bank subsidiaries are constrained by regulatory shocks.
Domestic and Cross-Border Dual Strategy: Banking groups use a dual approach to mitigate policy shocks: domestic NBFIs are leveraged to cushion the impact on home-country lending, while foreign bank and foreign NBFI subsidiaries are used to support credit supply in core international markets.
Balance Sheet Strength as a Driver: The incentive to reallocate lending is strongest among banking groups with weaker balance sheets—those with higher distress risk or lower capitalization—who face the most binding constraints from macroprudential policies.
What are “Nonbank Financial Institutions” (NBFIs) in the context of banking group structures? NBFIs, often referred to as shadow banks, are non-deposit-taking financial intermediaries such as investment banks, broker-dealers, asset managers, and insurance companies that operate alongside traditional bank subsidiaries within a single banking group. Unlike bank entities, they do not have access to a direct deposit base but can rely on the parent group’s wholesale credit lines and internal capital. In the syndicated loan market, these entities have seen their share of banking group lending rise from 24 percent in 2010 to roughly 32 percent by 2024, reflecting their growing role as flexible conduits for credit.
Policy Relevance
The study highlights a critical transition where banking groups bypass the regulatory perimeter to maintain market share and profitability. By “banking on their nonbanks,” financial conglomerates weaken the effectiveness of macroprudential policy and increase bank-nonbank interconnectedness, which can mask systemic risks and complicate regulatory oversight.
Strategic Impact:
Managing Risk Weight Spillovers: The document cites that the 2009 RBI regulatory change—which adjusted bank risk weights on exposures to certain NBFIs—prompted those NBFIs to reallocate their lending toward smaller, younger, and riskier firms. This highlights how "indirect" macroprudential policy can alter the credit profile of the real economy through nonbank intermediaries.
Monitoring Interconnectedness: With NBFIs in India mobilizing more than 50% of their funds from banks, the study’s warning on “intra-group reallocation” is critical for the RBI to prevent banking groups from using their NBFC arms to bypass credit growth curbs.
Addressing Data Gaps: The report’s finding that India holds a 0.76% share in the global syndicated loan sample emphasizes the need for domestic regulators to integrate high-frequency data—similar to the FinOpen Index—to track shifting lending patterns across the bank-nonbank perimeter.
Consolidated Supervision: The study reinforces the importance of the RBI's Supervisory Framework for Financial Conglomerates, ensuring that capital and liquidity rules are assessed at the group level to prevent "banking on nonbanks" during periods of stress.
Follow the full working paper here: IMF Working Paper - Banking on Nonbanks