• In his letter to the G20, FSB Chair highlights high debt levels and vulnerabilities in non-bank financial intermediation (NBFI) as key risks to financial stability.
• Chair notes many of the underlying vulnerabilities in NBFI are still in place.
• FSB Chair also flags uneven progress in implementation of agreed NBFI policies and notes the need to finalise and implement these in a timely fashion.

The Financial Stability Board (FSB) published a letter from its Chair, Klaas Knot, to G20 Finance Ministers and Central Bank Governors, ahead of the G20 meeting on 25-26 July.

In his letter, Mr Knot highlights historically high debt levels of both government and private sector borrowers and vulnerabilities in real estate markets and NBFI as areas that deserve continuing attention. These vulnerabilities raise the potential for sharp price corrections in the event of a shock, which could be more likely amid heightened geopolitical uncertainty and rich asset valuations in some markets. He calls for full implementation of the agreed G20 financial regulatory reforms to address these vulnerabilities.

The letter covers the two reports the FSB is delivering to the G20: a stocktake on regulatory and supervisory initiatives related to the identification and assessment of nature-related financial risks, which was published last week; and the FSB’s annual progress report on its work to enhance resilience in NBFI, delivered together with the letter.

The letter notes that many of the underlying vulnerabilities that contributed to stress in the NBFI sector during recent market incidents are still largely in place. The NBFI progress report highlights a number of challenges hampering progress, including data challenges that impede a full assessment of NBFI vulnerabilities and the formulation of effective policy responses.

Addressing leverage-related vulnerabilities in NBFI is a key area of current policy focus, and the FSB expects to publish by the end of 2024 a consultation report with proposed policy solutions. The FSB continues to monitor and analyse NBFI vulnerabilities on an ongoing basis through the development of additional metrics and analytical tools, as well as through targeted deep dives in specific areas, including solvency and liquidity risks in an environment of rising interest rates, and vulnerabilities in private credit.

The report also outlines further work that will help the FSB determine whether collectively the reforms, once implemented by jurisdictions, have sufficiently addressed systemic risk in NBFI.

Source: FSB