G20 Watchdog: Addressing Non-Bank Financial Risks

The global financial landscape has evolved significantly since the 2008 financial crisis, with non-bank financial intermediation (NBFI) entities playing an increasingly prominent role. These entities, such as hedge funds, insurers, and other financial intermediaries, now account for nearly half of global financial assets. However, their rapid expansion has raised concerns about potential risks to financial stability. The Financial Stability Board (FSB), the G20's financial risk watchdog, has urged governments to address these risks and enhance their focus on non-bank financial intermediaries.

The FSB's 2024 Global Monitoring Report on Non-Bank Financial Intermediation highlights the growth and interconnectedness of the NBFI sector. Between 2009 and 2023, the sector grew by around 130%, making markets more vulnerable to stress events. Key vulnerabilities include high degrees of liquidity transformation in fixed income and mixed funds, as well as relatively high leverage in finance companies, broker-dealers, and structured finance vehicles. The interconnectedness of these entities, with captive financial institutions and broker-dealers having the largest total borrowings, further exacerbates these risks.



To mitigate these risks, the FSB has proposed several recommendations. Governments should enhance their focus on non-banks, ensuring they manage their credit risks adequately. This includes creating domestic frameworks to identify and monitor financial stability risks related to non-bank leverage. Policy measures should be selected, designed, and calibrated to mitigate identified financial stability risks. Additionally, counterparty credit risk management should be improved through the timely and thorough implementation of the Basel Committee on Banking Supervision's revised guidelines.



The FSB also emphasizes the importance of stepping up private disclosure practices in the non-bank sector and addressing regulatory inconsistencies by adopting the principle of "same risk, same regulatory treatment." Improved cross-border cooperation and collaboration are also crucial to mitigate systemic risks posed by non-bank financial intermediaries.

The rapid expansion of the NBFI sector has contributed to market interconnectedness and complexity, potentially posing substantial risks to financial stability. Governments must heed the FSB's warnings and take proactive measures to address these risks. By enhancing their focus on non-banks, managing credit risks adequately, and improving cross-border cooperation, governments can help ensure the stability and resilience of the global financial system.

In conclusion, the growth of the non-bank financial intermediation sector has brought significant benefits but also poses potential risks to financial stability. The FSB's recommendations provide a roadmap for governments to address these risks and ensure the long-term health of the global financial system. By taking these recommendations seriously, governments can help mitigate the risks associated with the NBFI sector and promote a more stable and resilient financial landscape.