The Banking Executive Magazine - February 2026 Issue 2

Banking on Nonbanks prudential policy effects. INTERCONNECTEDNESS WITHIN FINANCIAL GROUPS One of the most significant findings in recent research is that this reallo- cation effect is strongest among banking groups with weaker balance sheets. These institutions have greater incentives to shift lending to- ward less tightly regulated affiliates when faced with constraints at the bank level. Moreover, the effect appears partic- ularly pronounced among U.S. bank- ing groups and, to a somewhat lesser degree, euro-area groups. Investment banks and broker-dealers have played a central role in absorbing credit flows redirected from regu- lated bank subsidiaries. For the Arab region—where banking systems remain predominantly bank- centric but are increasingly linked to global capital markets—the lesson is instructive. Large regional financial groups are gradually broadening their scope to include asset manage- ment, investment banking, and alter- native credit platforms. As this diversification continues, internal re- allocation mechanisms may become more relevant. Interconnectedness between banks and nonbanks deepens financial in- tegration within groups but may also complicate supervisory oversight. Traditional regulatory boundaries be- come less aligned with economic re- ality. CROSS-BORDER DIMENSIONS: CREDIT WITHOUT BORDERS The reallocation effect is not con- fined to domestic affiliates. When macroprudential measures tighten at home, financial groups expand lend- ing abroad through foreign bank sub- sidiaries and, to a lesser extent, foreign nonbank entities. For domestic lending, the cushioning role is primarily played by domestic nonbank affiliates and foreign bank subsidiaries. For cross-border lend- ing, both foreign banks and foreign nonbanks contribute meaningfully to sustaining credit supply. This pattern underscores the impor- tance of consolidated supervision and cross-border regulatory coordi- nation. In a financially integrated en- vironment, national macroprudential measures may have diminished po- tency if credit can be rerouted through affiliated entities in other ju- risdictions. For Arab central banks—many of which oversee banking systems with regional footprints spanning the Gulf, North Africa, and beyond—this raises strategic considerations. The growing internationalization of Arab banking groups, combined with their increasing engagement in syndicated lending and structured finance mar- kets, suggests that supervisory frame- works must remain vigilant to group-wide dynamics. RISK IMPLICATIONS: A MEASURED ASSESSMENT One of the central concerns regard- ing the expansion of nonbank inter- mediation is whether it amplifies systemic risk. The evidence thus far is nuanced. Research indicates that the addi- tional lending channeled through nonbank subsidiaries is not dispro- portionately concentrated in higher- risk borrower segments. In other words, the reallocation of credit does not appear to be associated with a significant deterioration in portfolio quality. This finding may offer some reassur- ance. However, it does not eliminate risk considerations. Nonbanks typi- cally operate under different liquidity and capital regimes than banks. While they may not engage in de- posit-taking, their funding struc- tures—often reliant on market-based financing—can introduce vulnerabil- ities during periods of stress. The experience of recent market dis- locations globally has demonstrated that stress in nonbank segments can rapidly spill over into the broader fi- nancial system. As bank–nonbank in- terconnectedness deepens, the potential for contagion channels in- creases. Thus, the issue is less about immedi- ate asset quality deterioration and more about structural complexity and systemic resilience. RELEVANCE FOR THE ARAB FINANCIAL LANDSCAPE Arab banking systems vary in struc- ture, but several common features stand out: strong capitalization, sig- nificant public sector linkages, and growing engagement in international markets. Many central banks in the region have already adopted macro- prudential toolkits, including dy- namic provisioning, sectoral lending limits, and capital buffers. At the same time, sovereign wealth funds, pension funds, Islamic invest- ment vehicles, and regional asset managers are expanding in scale and sophistication. Credit funds and pri- vate debt platforms are gradually gaining traction, particularly in the Gulf Cooperation Council (GCC) markets. The region is not yet characterized by the same degree of nonbank dom- inance observed in advanced economies. Nonetheless, the trajec- tory is evident. As Arab financial cen- ters continue to develop capital markets and diversify funding sources, nonbank intermediation will likely assume a larger role. This development can be beneficial. Broader funding channels enhance market depth, reduce overreliance on bank balance sheets, and support corporate growth. Yet the experience of other jurisdictions demonstrates that balance and oversight are essen- tial. For Arab economists and regulators, the BANKING EXECUTIVE 38 ISSUE 206 FEBRUARY 2026