Recent incidents have shown that nonbank entities can create or amplify risk throughout the global financial system, but the pace of agreed-upon reforms has been “uneven” across nations “and we may already be losing momentum,” Klaas Knot, chair of the Financial Stability Board, said today in a letter to G20 finance members and central bank governors. He added that the board plans to submit a consultation report by the end of the year with proposed policy solutions to address the issue.
“Nonbank entities have been taking on additional leverage through off-balance sheet exposures, which have grown significantly over the past decade,” Knot said. “An ambitious policy approach is necessary to mitigate the financial stability risks associated with leverage.”
Knot’s letter was released the same day that FSB published a report on the progress of the adoption of nonbank financial intermediation, or NBFI, policies by the board and standard-setting bodies. NFBI has grown to almost half of global financial assets, according to the report. The proposed policy reforms seek to reduce excessive spikes in the demand for liquidity, enhance the resilience of liquidity supply in stress, and enhance risk monitoring and the preparedness of authorities and market participants. Implementation of the proposals has been uneven across jurisdictions, hampered by several factors, although Knot highlighted the challenge of gathering data on NBFI activities.
“Overcoming data challenges is crucial for a comprehensive assessment of NBFI vulnerabilities and the formulation of effective policy responses,” he said. “The FSB will continue its efforts to find ways to address the most salient data challenges in order to enhance the monitoring and regulation of the NBFI sector.”
The FSB also released a separate report on regulatory and supervisory initiatives among its members to address nature-related financial risks, such as biodiversity loss. It noted such work is “at an early stage globally” and is often less detailed than policies on climate-related risk. “There is a general recognition that more expertise is needed in the supervisory community, in central banks, and in the private sector to understand and, where needed, address nature-related risks,” according to the report.
