The views expressed in these remarks are those of the speaker in his role as Chair of the FSB and do not necessarily reflect those of the FSB or its members.
It is a great pleasure to host the launch event for the Financial Stability Board’s NBFI leverage report at the Bank of England, in my capacity as Chair of the FSB. This report is the latest example of the FSB’s vital role in our global financial system: bringing together the expertise of policymakers across the world to enhance financial stability.
Before I begin, I must extend my sincere thanks to my predecessor, Klaas Knot, for his exceptional leadership as FSB Chair during a term beset by shocks and uncertainty. Klaas took on this role during the Covid pandemic, when authorities still working to safeguard the financial system against the vulnerabilities revealed during the Global Financial Crisis (GFC) had to work quicky – and together – to manage an unprecedented global shock. His dedication was instrumental in ensuring a globally coordinated response, based on the principle – one of several agreed early on by the FSB membership – not to roll back reforms or compromise the objectives of existing international standards. That response spanned numerous areas of the FSB’s work, from banking reforms to crypto regulation, from assessing financial stability impacts of climate to operational resilience. It also included a significant programme of work focused on non-banks.
I will focus on non-banks.
Today, we are publishing recommendations for managing risks related to non-bank leverage. We have the co-chairs of the working group Cornelia Holthausen and Sarah Pritchard to thank for their outstanding leadership in overseeing the production of these recommendations.
Non-bank leverage is very much in focus for regulators and policymakers. And rightly so. Over the past decade, we’ve seen significant changes in the structure of markets, and the increasing role of non-banks. While leverage can bring benefits, we’ve seen repeatedly how excessive and poorly managed leverage can threaten financial stability.
I will also offer my view on what we as policymakers—and the FSB as an institution—need to do to ensure we have the right tools to stay one step ahead in a fast-changing financial landscape.
How did we get to the publication of this NBFI leverage report today?
Over the past 10 to 15 years, the structure of financial markets has changed significantly. After the GFC, there was a deliberate shift to move riskier activities out of the banking sector. This made sense: certain forms of risk-taking are not well-suited to back deposits – doing so could endanger depositors’ funds. These activities are better supported by investment capital, and therefore more appropriately housed in non-banks.
As a result, the non-bank sector has grown substantially. Today, it accounts for around half of global financial system assets. Investment fund assets have expanded globally from roughly $21 trillion in 2008 to $52 trillion in 2023.
This shift has not only changed the size of this sector; it has reshaped how the financial system functions. Much of the activity in core financial markets, and the associated vulnerabilities, now reside outside the banking system. Reliance on non-banks for credit intermediation and liquidity provision has increased. At the same time, business models have become more complex, global, and interconnected—and in some cases, less transparent to regulators and the market.
If not properly managed, these features can lead to sharp spikes in liquidity demand that can outpace supply, procyclicality, fire sales, and sudden jumps to illiquidity. The growing interconnectedness and correlated activity among diverse market participants mean that stress in one part of the system can quickly propagate to others.
To be clear, these changes are not inherently negative. They bring important benefits, like more efficient markets, better price discovery, and broader access to finance for the real economy. But they introduce vulnerabilities – like concentrated, correlated, often opaque positions that cascade through the system to core markets and core institutions – that must be carefully managed to ensure the stability required to support growth and innovation, even under stress.
We saw these vulnerabilities crystalise in 2020. During the onset of the Covid pandemic, global financial markets experienced severe stress in an episode commonly known as the “dash for cash”. The non-bank sector exhibited significant vulnerabilities and signs of a liquidity crisis.
We saw significant outflows from money market and open-ended funds. For example, non-government money market funds saw outflows of 11% to 25%, depending on type and currency. US corporate bond funds experienced weekly outflows of around 5% of assets under management—$109 billion—until central banks stepped in.
We saw the rapid redistribution of liquidity due to margin calls and material dislocations in key government bond markets. The spike in demand for the most liquid and safe assets led to a decoupling between the price of US Treasuries and their futures.
We saw the role that leverage could play in amplifying stress. Hedge funds were forced to unwind $90 billion of their so-called “basis trade” positions as they became largely loss making, contributing to extreme illiquidity in government bond markets.
Public authorities had to intervene in unprecedented ways to prevent further market dysfunction and strain on the real economy.
Since then, we’ve seen further stress episodes highlighting non-bank vulnerabilities. For example: the failure of Archegos, volatility in commodities markets following Russia’s invasion of Ukraine and in UK government bond markets during the LDI crisis, and stress in US Treasury markets in March 2023. In some cases, major public interventions were required to prevent broader economic fallout. In others, we had near misses – including in April this year.
In response to the dash for cash in 2020, the FSB – under Randy Quarles’ leadership – developed a multi-year work programme to assess and address vulnerabilities in the NBFI sector. The goals were clear: reduce excessive spikes in liquidity demand, enhance the resilience of liquidity supply during stress, and improve risk monitoring and preparedness among authorities and market participants.
Developing a policy response to vulnerabilities identified under this work programme has rightly been a priority for the FSB, and for me, as Chair of the FSB’s Standing Committee on Supervisory and Regulatory Cooperation. The case for these priorities has only strengthened as each new stress has hit.
Five years into this programme, we are seeing real progress.
In response to severe liquidity mismatches in money market funds and limited use of liquidity management tools in open-ended funds, the FSB published a new policy framework for MMFs and revised its OEF recommendations in collaboration with IOSCO.
The FSB, BCBS, CPMI, and IOSCO have also issued policies, best practices, and recommendations to improve margining practices and strengthen market participants’ preparedness to meet margin calls.
These are significant achievements.
But, they mean little if jurisdictions do not implement them. As time passes and memories of past crises fade, so does the urgency to implement reforms. But we would be misleading ourselves and the public if we thought these issues have been solved, simply because they haven’t flared up recently. Relying on the past not repeating itself is not a strategy. The global financial system requires sustained vigilance and intervention.
The NBFI Leverage Report published today marks another major policy reform.
It presents nine policy recommendations to address financial stability vulnerabilities from leverage in non-banks, particularly those in core markets and those arising through interlinkages between leveraged nonbanks and systemically important financial institutions. It provides authorities with a comprehensive toolkit to put in place a domestic framework to identify and monitor financial stability vulnerabilities from NBFI leverage and to take steps to design and calibrate policy measures, or combinations of measures, to contain NBFI leverage where it may give rise to those financial stability risks.
And the report could not be timelier.
Hedge funds and other leveraged investors are growing their positions in sovereign bond markets. This is a global phenomenon, driven in part by increased issuance and changes in investor demand.
In the US, hedge fund exposure to Treasury markets has grown rapidly and now stands at $1.8 trillion long and $1.4 trillion short—close to record highs. In Canada, hedge funds now account for roughly 40% of auction value in Canadian sovereign markets. In the euro area, hedge funds are increasing their derivatives exposures. In the UK, hedge fund net repo borrowing is at its highest since data collection began in 2016, with seven funds accounting for 90% of that.
The growth of leveraged strategies, along with concentration, and crowded positions in certain markets, is concerning. These trends can amplify shocks and impact liquidity. The global nature of leveraged NBFIs and their interconnection with financial markets means that shocks in one jurisdiction can easily spill over to another.
Implementing the report’s recommendations is therefore critical. The recommendations have been designed to allow for flexibility in terms of implementation. That said, international cooperation and coordination in policy design and implementation are essential given the high cross-border interconnection and potential for spill-over risks.
I said I would come back to what we as policy makers must do to ensure we have the right tools to stay one step ahead in a changing world.
Two challenges stand out.
First, in today’s uncertain environment, strengthening our ability to anticipate and assess vulnerabilities is more important than ever. Surveillance enables us not only to identify risks but to respond with targeted, evidence-based action. The FSB, with its unique cross-border vantage point, has a vital role to play in facilitating global financial stability surveillance. So both the FSB and national authorities must have robust, forward-looking toolkits to identify existing and emerging vulnerabilities across the financial system that allow us to take steps to mitigate them before they crystalise and propagate through the financial system. And showing the results of our surveillance can help participants better manage their risks too. The financial system has evolved significantly, and our assessment tools must evolve with it.
Data are one area where we are already leveraging international cooperation to make progress. A key obstacle to better surveillance is the persistent lack of timely, risk-focused data in non-banks, particularly around leverage, concentration, correlation, and crowded trades in core markets.
This is not a domestic issue. In some jurisdictions data gaps stem from the cross-border nature of sovereign bond markets and the absence of comprehensive data covering all market participants. So the FSB has launched a Task Force to address these data gaps and enable authorities to better identify vulnerabilities in financial markets.
Second, we must ensure that the policies we’ve agreed at the international level are fully and effectively implemented domestically.
This is especially important in a world where attitudes toward regulation are shifting, and growth is a priority. I want to underscore that sustainable growth requires a resilient financial system – there is no trade-off between financial stability and growth.
Effective implementation is essential to strengthening the stability of the financial system—especially in today’s uncertain and fragmented global environment. It enables a level playing field on which cross-border firms can operate, helping to guard against regulatory arbitrage and market fragmentation which can arise when reforms are applied inconsistently across jurisdictions.
International coordination is therefore critical—not just in designing and calibrating reforms, but in putting them into practice. While some progress has been made, implementation has been slow in some areas. For other NBFI reforms, it is still early days.
During my term as Chair, I will focus on driving progress in both of these areas.
