The Financial Stability Board (FSB) has been looking into risks around leverage in non-bank financial intermediation (NBFI) for a number of years. In 2023, a paper by the board concluded that the strategy was a significant contributor to market stress episodes – including the Archegos collapse in 2021 and the liability-driven investment crisis in 2022.
Leverage involves borrowing money to increase investment size, taking on a loan from a provider. NBFIs, financial bodies which offer banking services without full banking licenses, use the strategy to boost exposures, strengthen returns or hedge.
At the Investment Association Roundtable in February, Sarah Pritchard, executive director of consumers, competition and international at the FCA, said: “leverage is not inherently a cause for concern. [It] helps NBFI entities hedge their risks, it funds productive investment, helps achieve target returns for investors, and provides liquidity to the system. Leverage underpins well-functioning markets.
“However, the presence of leverage can create vulnerabilities, especially when it’s poorly managed, there’s a lack of transparency, or it is concentrated. In those cases, when a shock occurs, what normally brings benefits to the economy can suddenly become an amplifier of instability and a cause for loss of confidence.”
The FSB began a consultation to shape policy recommendations for the prevention or mitigation of financial stability risks related to NBFI leverage in December 2024. In responses, industry bodies were keen to stress that a nuanced approach is needed to mitigate the risks of leverage.
SIFMA voiced a number of oppositions to the proposals, stating: “The report seems to disregard the many benefits of leverage.”
Within derivatives and structured finance trades, these include efficient risk transfer, better price discovery and market stabilisation, it said.
The association argued that market and regulatory reforms introduced post-2008 have improved transparency and put measures in place that mitigate NBFI leverage-related financial risks.
It concluded, “The Consultation Report should also include more thoughtful consideration of the potential drawbacks and unintended consequences of deploying its very own recommendations. In addition to the burdensome costs of any additional reporting and disclosure requirements, we remain highly concerned that the introduction of any entity-based measures could have the net effect of reducing market liquidity and increasing the cost of hedging, among others.”
Broadly, associations advocated for a holistic approach that takes into account the range of NBFIs in the market, how they operate, and the interactions of different risks to financial stability.
In its response, the Loan Market Association said: “The NBFI universe, and the different uses of leverage therein, are vast and varied. As such, we believe that prior to imposing new regulatory requirements on NBFIs and their leverage providers, the FSB should delve deeper into specific sectors, markets and uses of leverage.”
EFAMA added that analysis of financial stability should be holistic, with non-leverage risks considered, it added. Once risk is identified, regulators should consider the specific activity and product in question and react accordingly, with consequences relative to the potential systemic risk created.
The group commended the FSB’s plan to introduce domestic frameworks to monitor leverage build-up. However, it suggested there should be an international agreement on standards to ensure clarity and consistency across Europe.
Similarly, ICMA advised the FSB to ensure alignment with global standards and target specific risk-prone products.
The association warned against a broad regulatory approach, stating that entities and markets most critical to financial stability should be prioritised by the FSB. The group specifically opposed the use of activity-based measures proposed by the board, commenting that these would fail to address identified risks, increase costs, and create market friction. Similarly, it said, entity-based measures would create regulatory burdens without targeting core issues.
©Markets Media Europe 2025
