The Financial Stability Board (FSB) recently published a report describing the progress over the past year and planned work to enhance the resilience of non-bank financial intermediation (NBFI). The report was delivered to G20 Leaders ahead of their Summit last weekend. NBFI has grown considerably over the past decade – to almost half of global financial assets – and become more diverse. However, the March 2020 market turmoil underscored the need to strengthen resilience in this sector, to ensure a more stable provision of financing to the economy and reduce the need for extraordinary central bank interventions. The FSB’s NBFI work programme includes analytical and policy work that builds on the lessons from the turmoil.
The report provides an overview of the NBFI ecosystem and a framework for analysing the availability of liquidity and its effective intermediation under stressed market conditions. Indeed, the ability of market participants to manage risks efficiently and minimise market dislocations when adjusting their portfolios is a key determinant of the functioning and resilience of the NBFI ecosystem. These dislocations become more likely in the case of large imbalances between liquidity supply and demand. NBFI resilience therefore depends on the behaviour of different types of entities in the NBFI ecosystem as well as on the infrastructure and activities that connect those entities together, and with other parts of the financial system.
The main focus of work to date has been on assessing and addressing vulnerabilities in specific NBFI areas that may have contributed to the build-up of liquidity imbalances and their amplification. This includes: policy work to enhance the resilience of money market funds; work to assess liquidity risk and its management in open-ended funds; work to examine the structure and drivers of liquidity in core government and corporate bond markets during stress; an examination of the frameworks and dynamics of margin calls in centrally and non-centrally cleared derivatives and securities markets; and an assessment of the fragilities in USD cross-border funding and their interaction with vulnerabilities in emerging market economies. The NBFI progress report describes the key findings to date and next steps in all of these areas.
Building on these findings, the FSB’s work going forward aims to develop a systemic approach to NBFI. It involves enhancing the understanding of systemic risks in NBFI to strengthen their ongoing monitoring; and, where appropriate, developing policies to address such risks. The focus of policy work is to ensure that the current policy toolkit is adequate and effective from a system-wide perspective, drawing on the lessons from the March 2020 market turmoil. The report details the FSB’s work programme on NBFI for 2022 and beyond.
Source: FSB
