The Financial Stability Board (FSB) has recently published a consultation report on leverage in non-bank financial intermediation (NBFI). The proposed policy recommendations are addressed to FSB member authorities and SSBs. They aim to enhance the ability of authorities and market participants to monitor vulnerabilities from NBFI leverage, contain NBFI leverage where it may create risks to financial stability, and mitigate the impact of these risks. The recommendations build on the 2023 FSB report on The Financial Stability Implications of Leverage in Non-Bank Financial Intermediation, which found that NBFI leverage played a significant role in recent episodes of market stress.
The nine policy recommendations cover:
- risk identification and monitoring, supported by a suite of risk metrics, and work to assess and address data challenges;
- measures to address financial stability risks related to NBFI leverage in core financial markets, including measures that affect specific activities, types of entities, and concentration-related risks;
- counterparty credit risk management and private disclosure;
- addressing inconsistencies by adopting the principle of “same risk, same regulatory treatment”; and
- enhancing cross-border cooperation and collaboration.
Entities in scope are non-bank financial firms that use leverage, either financial or synthetic, including hedge funds, other leveraged investment funds, pension funds, and insurance companies. Where relevant, banks and broker-dealers are also in scope in their role as leverage providers.
The FSB notes that market structures, legal frameworks, and financial stability risks related to leverage vary across jurisdictions. The report outlines general principles for the selection, design, and calibration of policy measures, noting that, in many cases, combinations of the policy measures outlined may be most effective in addressing financial stability risks arising from NBFI leverage.
