Global: G20 Watchdog Warns of Vulnerabilities in Non-Banks, Calls for Reforms

The G20’s risk watchdog has highlighted significant vulnerabilities in the global financial system due to incomplete reforms in the non-bank sector, including money market funds. The Financial Stability Board (FSB) stated on Monday that despite efforts to enhance safety, many underlying issues remain unresolved, leaving the system open to potential shocks.

These vulnerabilities were evident during the initial COVID-19 lockdowns when central banks had to inject liquidity to stabilize money market funds amid a “dash for cash.” The FSB noted that progress among G20 countries in implementing reforms related to investment funds, margining, and liquidity has been inconsistent, with momentum potentially waning, according to FSB Chair Klaas Knot. Knot communicated these concerns in a letter to G20 central bankers and finance ministers meeting in Brazil this week.

Non-banks, encompassing insurers, private equity firms, hedge funds, and other investment entities, now represent nearly half of global financial assets. To bolster the resilience of the global financial system, it is essential to complete and commit to the full and timely implementation of non-bank financial intermediation (NBFI) reforms, Knot emphasized.

However, progress is hindered by the sector’s diverse nature and the challenge of obtaining comprehensive data. The investment fund sector has lobbied heavily against some of the proposed reforms, arguing that various market segments experienced stress during COVID-19.

A debate persists between central banks, which aim to avoid market interventions to cover liquidity shortfalls at investment funds, and securities watchdogs regarding the extent of non-bank regulation. Despite this, the FSB plans to move forward with new rule-making, proposing by year-end strategies for regulators to address leverage in non-banks such as broker-dealers, hedge funds, finance companies, and securitization vehicles.

“An ambitious policy approach is necessary to mitigate the financial stability risks associated with leverage,” Knot stated. He also noted that higher interest rates warrant close monitoring of vulnerabilities in the real estate market.