Financial Stability Board outlines new steps to address nonbank sector vulnerabilities

Financial Stability Board outlines new steps to address nonbank sector vulnerabilities
Banking & Financial Services
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Klaas Knot Chair of the FSB | Financial Stability Board

The Financial Stability Board (FSB) highlighted the increasing significance and complexity of nonbank financial intermediation (NBFI) during a virtual seminar organized by the Program on International Financial Systems. The discussion centered on leverage in the nonbank sector, which FSB representatives described as one of the most urgent issues for global financial stability.

In recent years, NBFI has grown substantially and now represents nearly half of global financial assets, totaling about $240 trillion as of 2023. This expansion has been driven by regulatory changes, prolonged low interest rates, and technological advances. The sector includes a wide range of entities such as money market funds, open-ended funds, hedge funds, pension funds, and insurance companies.

FSB officials noted that vulnerabilities within NBFI have contributed to several episodes of market turmoil. For example, in March 2020 at the start of the COVID-19 pandemic, money market funds faced significant liquidity pressures that required central bank intervention. In March 2021, the collapse of Archegos Capital Management exposed risks related to leverage and concentrated exposures among nonbanks. September 2022 saw UK pension funds experience severe liquidity challenges due to liability-driven investment strategies following a sharp rise in gilt yields. More recently, in April 2025, unwinding leveraged trades by nonbank investors contributed to increased US Treasury bond yields.

The FSB has responded with targeted policy recommendations aimed at enhancing monitoring and addressing risks posed by NBFI leverage. These recommendations focus on two main areas: risks arising in core financial markets and those stemming from connections between leveraged nonbanks and systemically important institutions that provide leverage.

"The recommendations are not a one-size-fits all solution," an FSB official stated during the seminar. "The recommendations are addressed to FSB member authorities and focus on markets, entities, and activities where NBFI leverage can create financial stability risks."

Key aspects include urging authorities to establish domestic frameworks for identifying and monitoring risks effectively; adopting activity-based measures like minimum haircuts or margin requirements for securities financing transactions; considering entity-based measures such as direct limits on leverage; improving counterparty credit risk management; reviewing disclosure practices; and promoting cross-border cooperation for coordinated crisis responses.

Regarding implementation challenges, an FSB representative emphasized: "Critically, we must continue to address data challenges. While we no longer use the term 'shadow banking,' the negative connotations of that term hinted at the difficulty that authorities have in understanding the sector owing to the lack of data." The board's newly formed task force is working on closing data gaps—particularly concerning leveraged trading strategies—and improving information sharing among regulators.

Authorities are currently considering these recommendations and some jurisdictions have begun taking concrete steps. The FSB is planning supervisory discussions focused on policy measures addressing NBFI-related leverage risks across different sectors.

In conclusion, FSB leaders called for continued vigilance amid evolving market conditions: "Finally, we must remain vigilant to emerging risks. The financial system is constantly evolving, and so too must our approach to safeguarding it."