What the capital regime should do – but is not doing at present – is to promote the creation of capital buffers and restrain the build-up of excessive risk-taking during the upswing of the economic cycle while containing the costs of financial distress in the downturn.
Regulatory reforms implemented in response to that crisis, changes in technology, developments in U.S. dollar funding, and, importantly, the growth of NBFI all contributed to a changed landscape. Beyond the growth of the NBFI sector, there has also been considerable change within this sector. Business models and financial services provided by NBFIs have become more diverse.