what are nonbank financial companies 
nonbank financial companies nbfcs also known as nonbank financial institutions nbfis are financial institutions that offer various banking services but do not have a banking license generally these institutions are not allowed to take traditional demand deposits readily available funds such as those in checking or savings accounts from the public this limitation keeps them outside the scope of conventional oversight from federal and state financial regulators nonbank financial companies fall under the oversight of the dodd frank wall street reform and consumer protection act which describes them as companies predominantly engaged in a financial activity when more than 85 of their consolidated annual gross revenues or consolidated assets are financial in nature 1 examples of nbfcs include investment banks mortgage lenders money market funds insurance companies hedge funds private equity funds and p2p lenders investopedia michela buttignolunderstanding nbfcsnbfcs can offer services such as loans and credit facilities currency exchange retirement planning money markets underwriting and merger activities the dodd frank wall street reform and consumer protection act defines three types of nonbank financial companies foreign nonbank financial companies u s nonbank financial companies and u s nonbank financial companies supervised by the federal reserve board of governors 1foreign nonbank financial companies are incorporated or organized outside the u s and are predominantly engaged in financial activities such as those listed above foreign nonbanks may or may not have branches in the united states 1u s nonbank financial companies like their foreign nonbank counterparts are predominantly engaged in nonbank financial activities but have been incorporated or organized in the united states u s nonbanks are restricted from serving as farm credit system institutions national securities exchanges or any one of several other types of financial institutions 1the main difference between these nonbank financial companies and others is that they fall under the supervision of the federal reserve board of governors this is based on a determination by the board that financial distress or the nature scope size scale concentration interconnectedness or mix of activities at these institutions could threaten the financial stability of the united states 2shadow banks and the 2008 financial crisisnbfcs existed long before the dodd frank act in 2007 they were given the moniker shadow banks by economist paul mcculley at the time the managing director of pacific investment management company llc pimco to describe the expanding matrix of institutions contributing to the then current easy money lending environment which in turn led to the subprime mortgage meltdown and the subsequent 2008 financial crisis 34although the term sounds somewhat sinister many well known brokerages and investment firms were engaging in shadow banking activity investment bankers lehman brothers and bear stearns were two of the most well known nbfcs at the center of the 2008 crisis 5as a result of the ensuing financial crisis traditional banks found themselves under closer regulatory scrutiny which led to a prolonged contraction in their lending activities as the authorities tightened up on the banks the banks in turn tightened up on loan or credit applicants the more stringent requirements gave rise to more people needing other funding sources and hence the growth of nonbank institutions that were able to operate outside the constraints of banking regulations in short in the decade following the financial crisis of 2007 08 nbfcs proliferated in large numbers and varying types playing a key role in meeting the credit demand unmet by traditional banks 6nbfc controversyadvocates of nbfcs argue that these institutions play an important role in meeting the rising demand for credit loans and other financial services customers include both businesses and individuals especially those who might have trouble qualifying under the more stringent standards set by traditional banks not only do nbfcs provide alternate sources of credit proponents say they also offer more efficient ones nbfcs cut out the intermediary the role banks often play to let clients deal with them directly lowering costs fees and rates in a process called disintermediation providing financing and credit is important to keep the money supply liquid and the economy working well alternate source of funding and creditdirect contact with clients eliminating intermediarieshigh yields for investorsliquidity for the financial systemless regulated than banksnon transparent operationssystemic risk to financial system economyeven so critics are troubled by nbfcs lack of accountability to regulators and their ability to operate outside the customary banking rules and regulations 78 in some cases they may face oversight by other authorities such as the federal trade commission ftc the securities and exchange commission sec if they re public companies or the financial industry regulatory authority finra if they re brokerages however in other cases they may be able to operate with a lack of transparency all of this could put an increasing strain on the financial system nbfcs were at the epicenter of the 2008 financial crisis that led to the great recession critics point out that they have increased in numbers since then and therefore represent a greater risk than ever before 6real world example of nbfcsentities ranging from mortgage provider quicken loans to financial services firm fidelity investments qualify as nbfcs however the fastest growing segment of the non bank lending sector has been in peer to peer p2p lending the growth of p2p lending has been facilitated by the power of social networking which brings like minded people from all over the world together p2p lending websites such as lendingclub and prosper are designed to connect prospective borrowers with investors willing to invest their money in loans that can generate high yields p2p borrowers tend to be individuals who could not otherwise qualify for a traditional bank loan or who prefer to do business with non banks investors have the opportunity to build a diversified portfolio of loans by investing small sums across a range of borrowers although p2p lending only represents a small fraction of the total loans issued in the united states precedence research reported that the peer to peer lending market had a size of 26 3 billion in 2023 this market size is expected to continuously grow over the next decade 9