The Financial Stability Board (FSB) has released a consultation report addressing leverage in non-bank financial intermediation (NBFI). The proposed policy recommendations are directed at FSB member authorities and standard-setting bodies (SSBs), aiming to improve the capacity of authorities and market participants to monitor vulnerabilities from NBFI leverage, contain it when it poses risks to financial stability, and mitigate its impact. These recommendations build on the 2023 FSB report which identified NBFI leverage as a significant factor in recent market stress episodes.
The nine policy recommendations focus on several key areas:
- Risk identification and monitoring, supported by risk metrics and efforts to address data challenges.
- Measures to tackle financial stability risks related to NBFI leverage in core financial markets, affecting specific activities, entity types, and concentration-related risks.
- Counterparty credit risk management and private disclosure.
- Addressing inconsistencies through the principle of "same risk, same regulatory treatment."
- Enhancing cross-border cooperation and collaboration.
Entities covered include non-bank financial firms using either financial or synthetic leverage such as hedge funds, other leveraged investment funds, pension funds, and insurance companies. Banks and broker-dealers are also included in their role as leverage providers.
The FSB notes that market structures, legal frameworks, and financial stability risks associated with leverage differ across jurisdictions. The report outlines general principles for selecting, designing, and calibrating policy measures. It suggests that combinations of these measures may be most effective in addressing financial stability risks from NBFI leverage.
Comments on this consultation report are invited by the FSB until February 28, 2025. Responses will be published on the FSB website unless otherwise requested by respondents. The final report is expected to be released in mid-2025.
The proposed policy recommendations complement existing FSB initiatives aimed at enhancing liquidity preparedness among non-bank market participants during periods of market-wide stress. This work aligns with efforts by SSBs like the Basel Committee on Banking Supervision (BCBS) concerning counterparty credit risk management.
The FSB coordinates international work among national financial authorities and international standard-setting bodies to develop effective regulatory policies for financial stability. It engages with national authorities from 24 countries and jurisdictions along with international institutions and sector-specific regulators. The FSB is chaired by Klaas Knot, President of De Nederlandsche Bank, with its Secretariat located in Basel, Switzerland.