The risks arising from unsustainable indebtedness to which both traditional and alternative financing sectors have exposure are higher in emerging economies, where the debt burden is much more elevated generally and whose borrowers are more susceptible to default if (as is expected), US dollar interest rates rise. Emerging economies with less policy intervention, monitoring and regulation are more vulnerable than advanced economies.

In the eighth installment of the Finding Balance series, we take a closer look at the phenomena of rising global indebtedness and alternative financing (non-bank financial intermediaries, or also known as shadow banking), in light of the COVID-19 pandemic. Here are some key takeaways from the report:

  • Global indebtedness has continued to increase since the 2008 financial crisis and with it, concerns over the vulnerabilities posed to both individual corporates and economies by this growing burden.
  • Loose monetary policy has accentuated the issue of debt. Low interest rates have encouraged investors into higher risk assets acting as “jet fuel” for private equity acquisitions, making financing cheaper and easier. Higher risk issuers have been able to raise debt at progressively cheaper rates as investors seeking income buy into bonds.
  • Similarly, the alternative financing (shadow banking) sector has grown since 2008 with non-bank financial intermediation, such as pension funds, insurance corporations and other financial intermediaries now making up around half of the global financial system.
  • The degree of interconnectedness between banks and non-bank financial institutions has largely remained stable over recent years. Banks regularly extend credit to (or invest in) insurers and pension funds as examples, while these in turn provide funding to banks.

Despite financial stability vulnerabilities, many shared with global indebtedness, the sector has come through the pandemic well positioned to further increase its market share compared to more heavily regulated banks that are subject to costlier prudential requirements.

You can read the full report – Finding Balance: The Phenomena of Rising Global Indebtedness and Alternative Financing – to know more about these phenomena as they relate to financial institutions.

You can also check previous installments of our Finding Balance: The Post-COVID Landscape for Financial Institutions covering the trends Sustainability in Financial Institutions and Increasing Regulatory Scrutiny of Financial Institutions.


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