Isabel Schnabel: The rise of non-bank finance and its implications for monetary policy transmission

Speech by Ms Isabel Schnabel, Member of the Executive Board of the European Central Bank, at the Annual Congress of the European Economic Association (EEA), Frankfurt am Main, 24 August 2021.

The views expressed in this speech are those of the speaker and not the view of the BIS.

The financial system plays a central role in transmitting monetary policy to the real economy. Whenever a central bank adjusts its policy instruments, it relies on private financial intermediaries to translate the monetary impulse into the financing conditions for firms and households. In today's speech, I will discuss how this process is shaped by the structure of the financial system and, specifically, by the relative importance of bank versus non-bank finance in the economy.

This question is motivated by the pronounced rise in non-bank financial intermediation in the euro area, especially after the global financial crisis. Non-bank financial intermediaries now make up a much larger share of the financial system than they did in the early years of our common currency. Likewise, a growing number of firms resort to market finance to satisfy their demand for credit. For central banks, it is therefore crucial to understand whether and how these developments matter for the transmission of monetary policy.

I will argue that the rise in non-bank finance is likely to have broadened monetary policy transmission, while it has also created new risks for the conduct of monetary policy.