In the 20th century, banks formed the foundation of the global financial system. No more. If there were any doubts about the shifts that have taken place in finance in the past several decades, recent events in the UK should dispel them.

The Bank of England made two important interventions in the past two weeks to support financial stability; neither of them directly involved banks. In response to violent moves in long-dated gilts — following the government’s since-discarded proposal to cut income taxes for the highest earners — the central bank hastily rolled out a program to buy up to £65 billion ($113 billion) of the government bonds. And, in partnership with the UK Treasury, it announced £40 billion of emergency funding for energy companies struggling to meet margin calls.

Together, they reflect the evolution at the heart of the global financial order: no longer is the system based around banks; rather, it is increasingly centred around markets. It’s an important distinction, with wide-ranging implications.

When banks served as gatekeepers, central bankers had a simpler life. To fulfil their obligation to ensure financial stability, they served as lenders of last resort to banks – a role they fulfilled extensively during the global financial crisis. By restricting the number of banking licences, they maintained control of the sector and by extension the financial system.

But over the years, lenders ceded market share to a diverse roster of financial institutions. Twenty years ago, banks held 46 per cent of global financial assets, according to data from the Financial Stability Board; that’s now down to 38 per cent. In contrast, non-bank financial institutions – comprising insurance companies, pension funds and others – make up 48 per cent, up from 41 per cent in 2002. While the trend reversed briefly during the global financial crisis of 2008, it resumed its prior course at an accelerated rate shortly afterward.

To fund their operations, non-bank institutions rely on wholesale markets and, in particular, government bonds, which serve as collateral allowing them to borrow. Many also use the same collateral to support hedging programs.

‘There is every reason to believe that, absent further action, we will see more frequent periods of dysfunction in the very markets increasingly relied on by households and firms.’

Andrew Hauser, Bank of England

The system has many merits, providing institutions ready access to financing and hedging solutions using the security of a safe, liquid asset. But it does have an unfortunate tendency towards pro-cyclicality: periods of market turbulence can drive sharply higher collateral requirements, which can prompt more turbulence if that leads to forced selling – such as we saw in the UK last week.

In the past, banks may have stepped in to manage the fallout, but due largely to tighter post-crisis rules on trading and capital, their balance sheets have been left very small relative to the size of collateral markets. In the UK, for example, the assets of UK government bond market makers have fallen by 25 per cent since 2008 at the same time as the stock of UK government bonds outstanding has increased by 2.7 times.