Receive free Financial Stability Board updates
we will send you myFT Daily Digest Email summary of latest news financial stability board There is news every morning.
Global financial stability regulators are investigating the accumulation of debt outside traditional banks, aiming to limit lending by hedge funds and increase transparency.
Claes Knott, chairman of the Financial Stability Board, told the Financial Times that the review aimed to address rising risks from so-called “non-banks”, including hedge funds and private capital.
“If we want to reduce these vulnerabilities, we have to address this problem,” he said, referring to the key role non-bank debt has played in triggering recent crises, such as the collapse of the U.S. bond market. The beginning of the pandemic.
Knott said the review was a priority because non-bank leverage “could threaten financial stability”.
During the “cash rush” in March 2020, highly leveraged hedge funds – which often borrow from banks to increase the size of their positions – were widely blamed for sending global bond markets into freefall.
“There are areas where we can reduce risk by increasing transparency,” Knott said, referring to having banks share information about loans to hedge funds and others.
But he warned: “In other areas we may have to actively control the levers that are taken.”
The Financial Stability Board, which consists of central bank governors, finance ministers and regulators, lacks legally binding powers but can set its agenda through the recommendations and decisions of its individual members within their respective jurisdictions.
The agency hopes to announce proposals next year to monitor and limit non-bank leverage.
Notte, who is also the governor of the Dutch central bank, said such measures could include pushing banks to require investment funds to post more collateral for borrowing against certain securities, ultimately limiting lending.
He said the collapse of Archegos Capital in 2021, which triggered a $4.7 billion loss and led to the bankruptcy of Credit Suisse, also highlighted the risks of incomplete information on non-bank lending.
“The Archegos case revealed that there wasn’t much transparency about the bank’s exposure to the investment firm,” Knott said. He added that individual banks “have no knowledge of other banks’ exposures, so there is no unified supervision. That is obviously something to put on the table”.
The review will be co-chaired by Sarah Pritchard, head of markets at the UK Financial Conduct Authority, and Cornelia Holthausen, head of financial stability at the European Central Bank.
Verena Ross, head of European securities regulator Esma, told the Financial Times that she welcomed the FSB’s efforts to increase transparency. She said it was “important” for banks to fully understand who they were lending to “to make sure they truly understand their positioning”.
Previous attempts to examine the accumulation of debt outside the banking system include annual report Iosco, the international organization of securities regulators, launched an initiative in 2019 on lending to investment funds.
Svlook
