This, in turn, will help firms weather a possible shock to the banking sector and a resulting decline in the supply of bank credit, as they would be able to draw on other – market-based – funding sources. But this can only happen if market-based finance remains resilient in the face of such a shock.
The benefits of a growing non-bank financial sector are currently accompanied by potential vulnerabilities. In search of higher yields, non-banks have accumulated more credit and liquidity risks on their balance sheets. This renders them more vulnerable to the low credit quality and high indebtedness in some segments of the corporate and government sector.