NANB, short for "Non-bank financial institution," is a term that refers to a type of financial institution that operates outside the traditional banking system. Also known as shadow banks, these institutions provide a range of financial services similar to traditional banks but function with different regulatory frameworks and may not accept deposits like banks.
NANBs typically engage in activities such as lending, borrowing, investment, and asset management. They often specialize in specific areas, such as consumer lending, mortgage lending, asset-backed securities, mutual funds, or insurance. These institutions can support economic growth by extending credit to borrowers who may not meet the criteria set by traditional banks or provide specialized financial products and services that banks do not offer.
However, due to their differences in regulatory oversight compared to traditional banks, NANBs may pose various risks to the financial system. Their activities can create potential vulnerabilities, including credit risk, liquidity risk, and interconnectedness risk, which may contribute to financial instability.
Regulators and policymakers keep a close eye on NANBs to maintain financial stability and protect consumers. They work to establish appropriate regulatory frameworks, such as capital and liquidity requirements, risk management standards, and disclosure rules, to ensure these institutions are adequately monitored, protected, and do not pose systemic risks to the financial system.
