Financial Stability Board calls for limits on leverage in shadow banking sector
The Financial Stability Board (FSB) has recommended that regulators impose direct limits on leverage used by non-bank financial institutions, commonly called "shadow banks", in core financial markets, alongside measures to control their size and concentration.
Shadow banks, which include hedge funds, private credit providers, and insurers, held nearly $218 trillion in assets in 2022, representing just under half of the world’s financial assets. The FSB and global regulators are increasingly concerned about the sector’s rapid growth, lack of transparency, and potential to destabilize broader financial markets, News.Az reports, citing Yahoo Finance.
The FSB highlighted past incidents such as the 2020 market crash triggered by leveraged hedge funds, the 2021 collapse of Archegos Capital, and 2022 turmoil linked to British pension fund hedging, demonstrating the risks posed by shadow banking leverage.
Key recommendations include:
- Introducing direct leverage limits where needed.
- Strengthening margin requirements in derivatives markets.
- Limiting concentration risks by curbing over-dominance of firms.
- Requiring reporting of large positions.
- Enhancing regulatory coordination to prevent arbitrage caused by inconsistent rules.
The FSB urges authorities to implement measures tailored to identified financial stability risks to make shadow banking safer and more transparent.
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