FSB Secretary General Underscores Focus on Non-Bank Financial Intermediation

Financial Stability Board ("FSB") Secretary General John Schindler underscored the FSB's focus on the "vulnerabilities associated with liquidity mismatches and leverage in non-bank financial intermediation."

In an address before the International Financial Banking Society, Mr. Schindler argued that the factors that contributed to the recent bank failures were not unique to banks. He said that while vulnerabilities, concentrated exposure and poor risk management are common to both banks and non-banks, non-banking financial institutions are not regulated in the same way. He stated that because it is harder to identify non-banks with these risk profiles, the FSB has remained "emphatic" in maintaining its focus on key vulnerabilities of NBFIs, particularly as to liquidity and leverage.

• Liquidity. Mr. Schindler said that the NBFI "ecosystem" depends on the availability of liquidity. Her said that imbalances can be caused due to (i) large and unexpected changes in demand, (ii) insufficient liquidity supply, and (iii) "various amplification mechanisms." He stated that the FSB is particularly focused on assessing the impact of NBFI activities that can act as "key amplifiers" of stress including (i) on the demand side, liquidity mismatches "between daily or frequent redemption possibilities on the liability side and not enough liquid assets on the asset side," and (ii) on the supply side, factors that cause banks’ and non-banks’ inability to absorb large spikes in liquidity demand. Mr. Schindler said that the FSB made several policy recommendations based on its findings that "largely involve repurposing existing micro-prudential and investor protection policy tools." These include (i) policy actions on open-ended funds to reduce spikes in demand for liquidity and (ii) enhancing the resilience of liquidity supply in periods of stress.
• Leverage. Mr. Schindler said that the FSB’s work is less advanced in examining NBFI leverage. He said the FSB plans to provide a report to the G20 in September 2023 on NBFI leverage trends as a precursor to policy recommendations. He emphasized the importance of managing leverage, pointing to shocks on the build-up of leverage as potential causes for amplifying stress on the financial system. He added that the high concentration of non-bank financial leverage in hedge funds can make leverage "harder to identify" in the financial system, due to large hedge funds spreading their borrowing across multiple prime brokers.