Bank of England warns of escalating risks in growing non‑bank financial sector

Andrew Bailey has sounded a stark warning about the vulnerability posed by the fast‑expanding web of non‑bank financial firms, urging regulators to act quickly to shore up resilience across what he described as a large and increasingly opaque market.

The Bank of England governor acknowledged that banks are in a far stronger position than before the 2007–09 crisis, but he cautioned that the same cannot be assumed for market‑based finance. “Just because the banking system is in a far more resilient position now than in the past is no reason to rest on our laurels,” he wrote in an article for The Banker. “There remains a particular and urgent need to increase resilience in market‑based finance globally given that the sector is very large and fast‑growing. It is disparate in nature and opaque in important places, meaning that the international interlinkages are, perhaps unsurprisingly, complex and hard to observe.”

Regulators’ concern is supported by recent data showing the non‑bank financial intermediation sector has been expanding rapidly. According to the Financial Stability Board’s 2024 Global Monitoring Report on Non‑Bank Financial Intermediation, assets in the sector grew by 9.4% in 2024, roughly twice the pace of banks, and now represent 51% of worldwide financial assets, about $256.8 trillion. Industry reporting and regulatory commentary have flagged that this growth is concentrated in areas such as private credit, hedge funds, insurers and pension fund allocations to alternative strategies.

That expansion has magnified the potential for hidden linkages to transmit stress. The gilt market turmoil in the UK in September 2022, which intensified because of liability‑driven investment strategies used by pension funds, remains a vivid recent example of how strains outside the banking sector can ripple through markets. Regulators also point to high‑profile failures involving private finance vehicles that highlighted funding fragilities and raised questions about transparency and risk‑sharing arrangements.

Addressing data shortages and the difficulty of mapping exposures has become central to supervisory efforts. The Bank of England has launched major initiatives to improve its visibility of market‑based finance, including system‑wide exploratory scenarios. The first exercise examined vulnerabilities in the gilt market; a second scenario, initiated in December, concentrates on private markets with an emphasis on private credit. “We need a robust understanding of how risks might flow through the financial system in a stress,” Sarah Breeden, deputy governor for financial stability, said when the test was unveiled.

International authorities are echoing similar concerns. The FSB report and subsequent coverage in trade press underscored the scale of non‑bank assets and the speed of their growth, prompting calls for stronger cross‑border data sharing and amplification of macroprudential tools that can be applied beyond banks. Regulators face a delicate balance: ensuring market‑based finance continues to provide credit and liquidity to the real economy while containing systemic vulnerabilities that could arise from leverage, liquidity mismatches and concentrated funding practices.

Bailey and other supervisors argue that patchy transparency and structural complexity make it harder to observe how shocks would transmit across jurisdictions and institutions. As a result, policymakers are pursuing both improved reporting and targeted stress‑testing to reveal weak points, and are considering reforms to ensure that entities operating outside traditional banking are subject to appropriate resilience standards.

The message from the Bank of England is clear: the improvements since the last crisis cannot be taken as sufficient if a different part of the financial landscape has expanded without commensurate oversight. With non‑bank financial institutions now holding roughly half of global financial assets, according to the Financial Stability Board, the push for better data, greater international cooperation and strengthened safeguards has become an urgent priority for authorities seeking to avert future episodes of market disruption.