The causes of financial crises rarely announce themselves ahead of time, and only a wide range of views can give us the perspective and understanding to address them in advance. The right model for this work is not a small team of detectives—it is a search party. The FSB’s efforts on nonbank financial intermediation, which I discussed last week, reflect a similar approach.
Nonbank financing has grown since the financial crisis, and it has been a source of systemic risk, often involving high leverage, maturity and liquidity mismatches, opaque structures, and concentrated holdings of risky assets. Nonbank financing can also lead to lower lending standards, bidding up the price of risky assets and sending an encouraging signal to credit underwriters.