Non-Bank Financial Institutions in the Extended Banking System: A Functional Taxonomy

In recent years, Non-Bank Financial Institutions (NBFIs) have overtaken banks as key actors in various financial activities. However, NBFIs encompass a wide range of institutions with diverse business models, making it essential to clarify their roles in the financial system. While post-Keynesian research highlights that NBFIs are integrated into the banking system — rather than functioning as a separate alternative — existing approaches often oversimplify their diversity or rely on overly detailed descriptions. This paper addresses the gap by proposing a simple, theoretically grounded taxonomy of NBFI activities based on post-Keynesian and Minskyan insights. It classifies NBFIs’ activities into three categories: (1) non-leveraged lending, where NBFIs passively accept bank-created deposits and use them to purchase financial assets, potentially expanding credit without increasing the money supply; (2) leveraged lending, where NBFIs borrow from financial institutions to extend credit, potentially increasing both credit and deposits; and (3) banks’ funding transformation, where NBFIs restructure banks’ liabilities through instruments like repos or securitization. Drawing on recent US data, including the From-Whom-to-Whom dataset, the paper provides support for the framework, showing how NBFIs increasingly operate alongside and within the banking system. This perspective helps clarify their macro-financial implications and informs ongoing debates around regulation and systemic risk.