FSB calls for precise, thoughtful nonbank financial regulation
The Financial Stability Board's Secretary General emphasized the critical importance of a resilient nonbank financial sector for global stability. He called for precise terminology and thoughtful regulatory approaches tailored to the sector's diversity.
Nonbanks' activities speak plainly on systemic risks
The nonbank sector has grown significantly since the Global Financial Crisis, now accounting for over half of global financial assets at approximately $260 trillion.
While providing critical services and alternative financing, this growth has introduced systemic risks.
Recent episodes, such as the COVID-19 pandemic's 'dash for cash,' the Archegos collapse, and the UK gilt market turmoil, starkly demonstrated these vulnerabilities.
These events highlighted how liquidity pressures, leveraged positions, and concentrated exposures in nonbanks can amplify market stress, necessitate central bank interventions, and lead to significant spillover effects across the financial system.
The FSB emphasizes that ensuring the resilience of this increasingly important sector is crucial for overall financial stability.
Beyond the 'shadow banking' label
The FSB Secretary General emphasized avoiding misuse of 'nonbank financial intermediation' (NBFI).
Evolving from 'shadow banking,' NBFI comprises a vast, heterogeneous array of entities—from money market funds to hedge funds—each with distinct business models and risk profiles.
Treating NBFI as monolithic oversimplifies its complexity, potentially misleading regulators and hindering identification of specific vulnerabilities.
As Elinor says in 'Sense and Sensibility,' 'A few years, however, will settle her opinions on the reasonable basis of common sense and observation.'
Precise terminology is crucial for tailored policy responses that accurately address diverse risks.
Tailored rules, not blanket mandates
The FSB's nuanced stance underscores the complexity of nonbank regulation, advocating for both bank-like and differentiated approaches.
A blanket application of bank-like rules would miss the sector's inherent diversity and unique risk profiles, potentially stifling beneficial financial intermediation.
Instead, tailored, activity-specific measures are essential to truly bolster financial stability without imposing disproportionate burdens.