FSB Urges Regulators to Limit Leverage for 'Shadow Banks' in Core Markets

Regulators are advised by the Financial Stability Board to impose direct limits on leverage and curb the size of non-bank financial firms in core markets to enhance the safety of ‘shadow banking’. Non-bank institutions held $218 trillion of global financial assets in 2022, raising concerns about transparency and market resilience.

The FSB highlights the significant role of leveraged non-bank financial institutions in market instabilities during events like the March 2020 COVID-19 market slump and the collapse of hedge fund Archegos in 2021. Lack of transparency and concentration of risks in the ‘shadow banking’ sector pose threats to broader financial markets.

A recent report by the FSB recommends financial regulators to improve monitoring of non-bank institutions and implement interventions to ensure financial system stability. Authorities are urged to address the risks of non-bank financial institution leverage in core markets through appropriate measures like direct limits on leverage and enhanced margin requirements.

Supervisors are encouraged to introduce direct limits on leverage, enhance margin requirements in derivatives markets, and implement curbs to prevent over-concentration of firms. The FSB also suggests improving regulatory coordination and addressing incongruent regulatory treatments to mitigate regulatory arbitrage and reduce financial stability risks.

Read more at Yahoo Finance: Regulators should limit leverage for ‘shadow banks’ in core markets, FSB says