The Financial Stability Board (FSB) has released a consultation report with nine policy recommendations aimed at addressing leverage risks in the non-bank financial intermediation (NBFI) sector. The NBFI sector, which accounts for nearly half of total global financial assets, has seen significant growth and complexity since 2009. This expansion poses potential risks to financial stability, as demonstrated by recent market stress events such as the March 2020 turmoil and the September 2022 UK gilt market dislocation.
The report's recommendations are intended to help authorities identify, monitor, and manage financial stability risks associated with NBFI leverage. "The recommendations should be seen as a comprehensive package that reflect the complexity of financial stability risks related to NBFI leverage in different jurisdictions," stated the FSB.
The first set of recommendations emphasizes establishing domestic frameworks for identifying and monitoring these risks. Authorities are encouraged to use data, risk metrics, and disclosures to enhance transparency and market discipline.
The second group proposes various policy measures tailored to mitigate specific financial stability risks posed by NBFI leverage. These include activity-based, entity-based, and concentration-related measures designed to be effective while considering potential costs and unintended consequences.
Enhancing counterparty credit risk management is addressed in the third group of recommendations. The FSB calls for implementing revised guidelines from the Basel Committee on Banking Supervision and improving private disclosure practices between leveraged entities and their providers.
The final two recommendations focus on regulatory congruence and cross-border cooperation. They advocate for "same risk, same regulatory treatment" to prevent arbitrage and ensure consistent management of financial stability risks across jurisdictions.
"The proposed recommendations recognise that a combination of policy measures... will likely be more effective in addressing these risks than any standalone measure," according to the FSB.
Further work will be conducted by the FSB and standard-setting bodies to assist authorities in applying these recommendations effectively. Stakeholders are invited to provide feedback during the consultation period as efforts continue toward enhancing NBFI sector resilience.