Mostly Economics

Jay Surti on IMF blog explains 5 megatrends on rise of non-bank finance:

• Governments have new lenders, enhancing liquidity and holding down rates: New nonbank buyers for bonds such as US Treasuries provide additional liquidity. This helps markets operate efficiently, which can help hold down the interest on national debt that taxpayers ultimately pay. In the United States, principal trading firms such as Citadel Securities and Jane Street Capital have developed business models around technology-driven high-frequency and algorithmic trading that have fueled this trend.
• Mid-sized businesses have gained more access to funding, supporting economic activity, employment, and financial resilience: Private credit funds can provide funding for businesses that may be too large or risky for banks to lend to, but too small to issue their own bonds. Many such funds are managed by private equity firms, which in turn get financing from banks and other nonbanks. These nonbanks—typically insurers, pension funds, sovereign wealth funds, and endowments—that provide funding to private credit funds tend to have lower leverage and funding that is more stable over longer terms compared to banks. So, they don’t have to pull funds back as quickly during times of stress, increasing the financial system’s resilience.
• More borrowing options for consumers and small businesses: Credit is available in a wider variety of amounts and durations, from longer-term auto loans, to “buy now, pay later” loans, and small mobile money loans in countries like Kenya. Fintech lenders have driven this trend by pioneering new sources of data for underwriting and making servicing cheaper through automation, enabling firms to make smaller loans to more people. In emerging and developing economies, they have made mobile payments available to more people, and with a broader set of financial services following behind.
• Investors of all sizes have more ways to diversify portfolios. Investment funds, and particularly passive investment vehicles, have expanded access to capital markets for individual investors. As returns on the safest assets dwindled, index funds rapidly increased their share of assets under management—from 19 percent in 2010 in the United States to 48 percent by 2023. And nonbanks made new asset classes, including commercial real estate and precious metals, available to more investors. More diverse assets can help all investors manage risk, although speculative assets have risks of their own.
• Beyond diversification benefits, another feature of passive investing merits mention: certain types of funds can provide a new stabilizing force for markets. One feature of these funds is that, to maintain the balance of stocks they promise to end-investors, they regularly and predictably buy more of the shares that get cheaper and sell more as their value rises. For example, when individual stocks rise enough to be added to a benchmark equity index, or are removed from it if their value falls. As they’ve attained great size, this dependable effect has helped to stabilize markets.