The Financial Stability Board (FSB) is currently consulting on the impacts of leverage in NBFIs and its potential threat to financial stability. Think Archegos and the LDI crisis.

NBFIs are linked to the banking system as they are key suppliers of leverage (they lend to NBFIs or execute securities financing transactions (SFTs) and derivatives with them). So, problems caused by excessive leverage could contaminate the banking system, impacting financial stability.

The FSB is suggesting more public and private disclosure of NBFI leverage through activity-based and entity-based measures. Members at a high-level support this. As NBFIs are outside the regulatory perimeter the FSB proposals effectively mean that banks should instead disclose their exposures to NBFIs.

We object to this as:

• It is not our job to police NBFIs on behalf of regulators
• Regulators already get ample data e.g. transaction reporting – they just need to amalgamate, share amongst G20 and use it better to get a holistic view
• Not all NBFIs (e.g. insurance companies which are already prudentially regulated) pose the same threat, through over-leverage, to the wider financial system
• There is no universal definition of what is an ‘NBFI’ nor when there is ‘excessive leverage'

We urge the FSB to reflect on the important insights revealed by new scenario analysis work under the recent BoE System-wide exploratory exercise and report. The FSB should urge other central banks to carry out and share learnings from similar exercises and give more weight to the benefits that international cooperation and coordination, on data sharing, especially when looking at reporting and regulating standards for NBFIs. 

The obvious answer is to bring NBFIs with the regulatory perimeter, although this is unlikely to happen any time soon. We think codes of conduct may be a suitable course of action initially to address the risks posed by leverage in NBFIs.

Read our full response to the FSB’s recent consultation.