Global regulators will "target" non-bank financial institutions, focusing on the rapid growth of private debt.

The Financial Stability Board (FSB) pledged on Monday that global regulatory authorities will take action early next year to control the leverage ratio of non-bank financial intermediaries (NBFI). Over a year ago, the chairman of the committee hinted at investigating the increasing borrowing of hedge funds, private capital markets, and other institutions. The FSB stated in its annual report released before this week's G20 meeting, "By early 2025, the FSB will publish a consultative report proposing policy recommendations, suggesting authorities monitor vulnerabilities and take policy measures to address systemic risks posed by NBFI leverage." The Basel-based institution referred to the ongoing evolution and growth of non-bank financial intermediaries, covering investment funds, insurance companies, and other institutions outside the banking sector, which currently hold nearly half of the world's financial assets. The report specifically highlighted private credit as an area of concern because of its rapid growth and "increasing evidence of its connections with the banking system and institutional investors." In recent months, regulatory authorities have intensified warnings about valuing private credit amid concerns that funds may be concealing the true health of their loan portfolios. The thriving market for risk transfers has prompted the International Monetary Fund (IMF) to express concerns about potential financial stability risks. Private credit funds have been taking on the risk exposure of bad loans from banks. "Private credit funds face credit risks, leverage, and liquidity vulnerabilities, but their opacity makes them difficult to assess," the FSB noted, without specifying any specific measures that could impact the industry. FSB's policy recommendations typically take several years to be adopted by various jurisdictions, and even then, adoption rates may vary. FSB was established after the financial crisis to prevent future financial disasters. The Financial Stability Board wrote, "The vulnerabilities of NBFI, including hidden or excessive leverage, remain potential sources of systemic risk. Combined with elevated asset valuations in some markets, significant price corrections could occur in the event of a shock. Policy approaches need to be combined with improved monitoring to mitigate vulnerabilities." In a letter to the G20, FSB Chairman and President of the Dutch Central Bank, Klaas Knot, appealed to global leaders to support work on NBFI and fulfill commitments already made, including implementing final rules on post-crisis bank capital. Knot stated, "Your continuing support in the coming period will be crucial because the Financial Stability Board will drive policy work in key areas through its members and promote the comprehensive, consistent, and timely implementation of agreed reforms." He warned, "There is no room for complacency." Knot's term will end in June. He expressed regret over the waning political support for financial regulation last month, and warned IMF leaders that they may face an "economic freefall" if they cannot focus. FSB has announced several measures targeting NBFI by 2024, including addressing liquidity mismatches in open-ended funds and strengthening non-bank institutions' readiness to meet margin and collateral requirements.