[4] The growing role of non-banks offers the benefit of diversifying sources of finance and can thereby help to ensure a smooth provision of funding to the real economy. [5] Evidence also suggests that a higher share of non-bank finance can help economies to recover faster from recessions,[6] when banks’ ability to lend may be impaired. [7] Crucially, however, the benefits of this diversification rely on making sure that the non-bank financial sector provides a stable source of funding, ensuring robust financing for companies in both normal and stressed market conditions. Liquidity and leverage – lessons from recent market events As the market footprint of non-bank financial institutions increases, new risks and vulnerabilities can arise. Let me discuss three in particular. First, the strong growth of the non-bank financial sector – especially the asset management industry – over the past 15 years has been accompanied by an increase in liquidity mismatches. A key contributing factor is that investors in open-ended funds – which account for the largest part of the investment fund sector – can typically redeem their shares on a daily basis without prior notice. This creates a liquidity mismatch especially in funds that invest in relatively illiquid assets, such as high-yield corporate bonds. Liquidity demand has become more procyclical as a result, especially during periods of financial market stress. During the pandemic, we saw how liquidity mismatches in open-ended funds increased demand for market liquidity, which amplified stress in financial markets.
When employers recommend that their employees “opt in” to retirement plans, they achieve a far lower rate of participation than when employees are automatically enrolled, but may “opt out.” What accounts for this? The economics of the plan work either way. And the incentives have not changed. Employees are not promised more money if they choose not to “opt out” than if they choose to “opt in.” But a better result is achieved by “nudging” employees simply by changing the starting point.2 Compliance programs may be more likely to achieve their desired effects if they are based on studies of how people actually behave. Here are three ideas that would benefit from continued empirical study. 1/6  BIS central bankers' speeches  First, can we increase participation in voluntary training and education programs by prepopulating enrollment? That is, can we rely on the same type of inertia that keeps employees from opting out of retirement savings programs? I’m speaking here of programs above and beyond the minimum training firms already require. These might explore in greater depth the ethical decisions that come up in corporate life—in particular, times when the corporation’s interest and a client’s interest appear to diverge. Second, I am interested in the potential for certain employees to serve as carriers for social norms. Their identification is not always based on rank in a corporate hierarchy. Step one is to find out who these people are. We might, for example, attempt to map electronic communication within an organization.