The Financial Stability Board (FSB) has released its final report on leverage in nonbank financial intermediation (NBFI), highlighting the importance of managing risks associated with non-bank leverage. The report was launched at an event hosted by the Bank of England, with the FSB Chair acknowledging the leadership of Klaas Knot during his term as Chair amid global financial uncertainties.
The FSB's new recommendations aim to address vulnerabilities linked to non-bank leverage. Co-chairs Cornelia Holthausen and Sarah Pritchard were commended for their roles in developing these guidelines. "Non-bank leverage is very much in focus for regulators and policymakers," noted the current FSB Chair.
The report reflects on significant changes in financial markets over the past decade, where riskier activities have shifted from banks to non-banks, resulting in a substantial growth of the non-bank sector. Non-banks now account for about half of global financial system assets.
Concerns were raised about how poorly managed leverage can threaten financial stability, as seen during events like the 2020 Covid pandemic-induced market stress. "Public authorities had to intervene in unprecedented ways," recalled the FSB Chair regarding past crises.
In response to these challenges, a multi-year work program was initiated under Randy Quarles’ leadership to assess NBFI sector vulnerabilities. The program led to policy frameworks addressing liquidity mismatches and improving margining practices.
Despite progress, implementing reforms remains crucial as memories of past crises fade. The newly published NBFI Leverage Report includes nine policy recommendations aimed at mitigating financial stability risks arising from leveraged non-banks and their connections with important financial institutions.
The report highlights growing hedge fund positions in sovereign bond markets globally, emphasizing that shocks can easily spread across jurisdictions due to high interconnectedness. "Implementing the report’s recommendations is therefore critical," stressed the FSB Chair.
Two main challenges identified include strengthening surveillance capabilities and ensuring effective implementation of international policies domestically. A Task Force has been established by the FSB to address data gaps hindering better surveillance of non-banks.
International coordination is deemed essential not only for designing reforms but also for putting them into practice consistently across borders. During his term as Chair, there will be a focus on advancing progress in these areas.