Global: G20 Financial Regulator Recommends Increased Liquidity Reserves for Non-Bank Entities

The Financial Stability Board (FSB), a G20 financial watchdog, has suggested that non-bank financial entities such as insurers, hedge funds, family offices, and commodities traders should maintain higher cash reserves and devise contingency plans to handle potential surges in collateral requirements. This recommendation aims to ensure stability in derivative markets during financial crises.

Non-banks, which represent almost half of the global financial ecosystem, are increasingly under regulatory scrutiny following several liquidity crises. Events such as the March 2020 liquidity crunch, when global lockdowns triggered a widespread “dash for cash,” and the financial strain on liability-driven investment funds following Britain’s tax cuts announcement in September 2022, underscored the vulnerability of these entities during market stresses. Additionally, the collapse of the family office Archegos in March 2021 and the volatility in commodities markets after Russia’s invasion of Ukraine highlighted significant liquidity management and governance deficiencies.

In response, the FSB’s report, which is open for public consultation, outlines policy recommendations emphasizing the importance of robust liquidity risk management and governance structures within non-banks. These recommendations propose that non-banks ensure they have adequate cash reserves and access to diverse liquid assets that can be readily sold even under stressed conditions. Additionally, the FSB urges these entities to implement rigorous liquidity stress testing to pinpoint potential areas of strain.

By focusing on enhanced liquidity preparedness, the FSB aims to mitigate the need for central banks to intervene and provide emergency liquidity to the market, a scenario observed during recent financial upheavals. The proposed measures also seek to standardize and strengthen the currently inconsistent or incomplete liquidity regulations that non-banks face, contrasting with the more stringent requirements imposed on traditional banking institutions.

This initiative reflects an expanding regulatory focus on the broader non-banking sector, which historically has been less stringently regulated in areas such as leverage and liquidity risk, particularly evident in minimal regulations governing commodities traders and certain hedge funds. The FSB, comprising treasury officials, central bankers, and regulators from G20 nations, plays a critical role in setting global financial policy standards intended to foster stability and prevent future crises.