The growing role of non-bank financial institutions need not weaken interest-rate policy’s effects on output and inflation, according to new Bank of England research. Bond-buying programs behave differently, depending on why non-bank finance has expanded.
The October 23 working paper uses a model estimated on UK data. Nicolò Bandera, Kristina Bluwstein, Michael Kumhof, Mauricio Salgado-Moreno and Jacob Stevens connect banks, non-banks and a central bank through deposits, bonds and reserves.
In their model, a larger non-bank sector leaves conventional rate policy’s effects essentially unchanged. Quantitative easing is amplified when expansion reflects companies’ preference for non-bank funding. When expansion instead results from more costly bank finance, its transmission changes little.
These are conditional model results, not a forecast or an announcement of Bank policy. The model simplifies a diverse financial system, and its conclusions depend on its structure and estimated parameters.
What counts as non-bank finance?
Non-bank financial intermediation describes financial activity performed by institutions outside the banking sector. It includes investment funds, insurance companies and pension funds, among others. An investment fund buying a company’s bond can help finance that business without making an ordinary bank loan.
The Financial Stability Board’s 2025 monitoring report estimates that the broad sector held $256.8 trillion in assets at the end of 2024, representing 51.0% of total financial assets in its monitoring exercise. Its 29 participating jurisdictions account for more than 90% of global GDP.
Non-bank assets grew by 9.4% that year, compared with 4.7% for banks. Those figures describe balance-sheet assets, not the amount of new lending to businesses. They also should not be read as a measure of private credit alone, which is only part of the broader landscape.
The FSB identifies links between banks and non-banks through deposits and loans, ownership of securities and other exposures. Financing outside a bank is consequently not financing outside the wider financial system.
Pension funds illustrate the range of institutions involved. Our earlier coverage of pension payouts and investment selling examines how retirement payments can affect portfolio decisions, quite apart from a fund’s role as a source of capital.
Rate changes and bond buying work differently
A central bank’s policy rate influences the rates available on savings and borrowing. Higher borrowing costs can discourage spending, while better returns on savings can encourage households to postpone purchases. Those changes help affect demand and inflation.
Quantitative easing, or QE, involves a central bank buying bonds to influence longer-term financing conditions. A bond is a loan made by investors to an issuer, such as a government or company.
The Bank’s explanation of QE describes how purchases can raise bond prices and lower yields, the returns available to buyers at those prices. Investors selling bonds may then buy other assets, helping transmit the effect across financial markets.
The distinction explains why the identity of financial institutions matters. A policy-rate decision changes the return on short-term money. A bond purchase also changes the assets investors hold and the alternatives they consider attractive.
Neither mechanism fixes the interest rate on every existing loan. Contracts, competition and the borrower’s condition still matter. The Bank’s guide to Bank Rate notes that lenders’ and savers’ rates need not move by the same amount as the policy rate.
A bond borrower still faces financing risk
The US Securities and Exchange Commission’s bond guidance distinguishes interest-rate risk from credit risk. Interest-rate changes affect the market value of existing bonds, while credit risk concerns whether an issuer can meet its obligations.
For a company, a fixed-rate bond can keep its contractual interest payments steady during its term. That does not guarantee the same borrowing cost when the bond matures and the company needs replacement funding.
Consider a hypothetical business whose fixed-rate debt matures next year. Its current interest bill might remain unchanged after a rate increase, but the terms available for a new bond could become less attractive. A business with floating-rate debt could feel the change earlier, depending on its contract.
Borrowers can therefore distinguish three questions: what they pay now, when their financing must be renewed, and whether lenders or investors will still provide the required amount.
Funding diversity does not remove the need to examine terms
Companies can obtain capital through different channels, including bank loans, bonds and selling ownership stakes. Our reporting on how an IPO can affect access to borrowing explores how these channels can interact. Raising equity and taking on debt remain different transactions with different obligations.
A useful comparison between funding offers therefore includes the interest basis, maturity, security and restrictions on the borrower, alongside the amount available. The label on the institution providing the money cannot answer those questions.
For a finance manager, changing lenders may broaden the available options. It does not, by itself, establish how quickly the business will feel a central bank decision or what its next round of financing will cost.
