FSB Report Warns of Systemic Risks in Nonbank Financial Sector

The turmoil observed in global financial markets earlier this spring during the COVID-19 pandemic highlighted the need to “strengthen the resilience in the [nonbank financial intermediation]sector,” according to a new report from the Financial Stability Board today.

While acknowledging that certain parts of the financial sector, “particularly banks and financial market infrastructures, were able to absorb rather than amplify the macro economic shock,” the report warned that “the financial system remains vulnerable to another liquidity strain, as the underlying structures and mechanisms that gave rise to the turmoil are still in place.” Such activities include significant outflows from non-government money market funds and other specific types of open-ended funds, redistribution of liquidity from margin calls, dealer intermediation in core funding markets and dislocation in key government bond markets, the report noted.

FSB said it will work to examine and address specific risk factors and markets that amplified the economic shock brought on by the pandemic, increase its understanding of systemic risks in NBFI (the FSB’s term for the shadow banking sector), and assess policies to address these systemic risks. Read the report.