Bank of Canada report shows MICs, private lenders, and investment funds gaining ground
Canada’s non-bank financial intermediation (NBFI) sector continues to grow rapidly, expanding the role of private lenders in the country’s credit landscape, including the mortgage lending space traditionally dominated by banks.
The NBFI sector is composed of all non-bank financial entities that engage in some form of financial intermediation. These include pension funds, investment funds, mortgage investment corporations (MICs), finance companies, and hedge funds.
Some of these institutions are increasingly engaging in bank-like functions such as maturity, liquidity, and credit transformation, which makes them key players in today’s housing finance system.
The value of Canadian NBFI assets climbed 5.7% in 2023, rebounding from a 5.5% decline the year prior, according to data compiled by the Bank of Canada for the Financial Stability Board’s (FSB) 2024 Global Monitoring Report on Non-Bank Financial Intermediation.
That growth, while slightly below the global average of 8.5%, was largely attributed to rebounding asset valuations across markets and represents a continued expansion in NBFI market share. NBFIs now account for 60.5% of total financial system assets in Canada, compared to 60.3% in 2022.
On the other hand, traditional deposit-taking institutions like banks and credit unions hold 34.6%, and the Bank of Canada’s own share shrank to 2.2%, largely due to quantitative tightening.
The total size of Canada’s financial system grew from $20.1 trillion to $21.2 trillion in 2023, a 5.4% increase. NBFIs were responsible for a substantial share of this expansion, supported by broad-based asset valuation gains.
The FSB’s “narrow measure” of NBFI, which includes entities engaging in bank-like functions such as maturity and liquidity transformation, also saw robust growth, with asset values increasing 6.2% in 2023.
Investment funds accounted for about 80% of these assets. Fixed income funds, credit hedge funds, and ETFs all posted strong growth. Notably, credit hedge funds grew 18.9% to $165.4 billion, ETFs expanded 19.5% to $136.6 billion, and money market funds surged 50.3%, though they still represent just 0.4% of total financial system assets.
Finance companies, which include private mortgage lenders and leasing firms, hold 12.8% of narrow NBFI assets and grew 4.3% over the year.
Even as investors pulled money out of open-ended mutual funds, asset values still rose due to improved bond market valuations, driven by expectations of rate cuts as inflation cooled in late 2023.
Only real estate investment trusts (REITs) experienced a drop in asset value, falling 14% due to rising interest rates and declining property valuations.
At the same time, the amount of residential mortgage debt held by non-bank lenders has surged. Statistics Canada reported a 19% jump in outstanding non-bank residential mortgages, growing from $338 billion in Q3 2020 to $401 billion in Q3 2024.
Read more: Half of homebuyers now use mortgage brokers as nonbank lending surges
While banks still dominate the mortgage market, more borrowers are turning to brokers to shop for better deals and navigate complex lending rules.
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