The Basel Committee on Banking Supervision (BCBS) has said that the surging growth of the Non-Bank Financial Intermediary (NBFI) sector could cause financial stability concerns, though its size and the associated risks vary amongst member jurisdictions.
In a Newsletter published over the weekend, the BCBS(a committee of global banking supervisory authorities), stated that recent episodes of distress highlighted vulnerabilities and deficiencies in some banks’ risk management practices related to NBFIs, adding that supervisors consider exposures to highly leveraged counterparties via derivatives and securities financing to be the riskiest.
Noting that supervisors are observing similar deficiencies in some banks’ management of commodity-related counterparties, the BCBS stated that supervisors will continue to monitor exposures, focus on the proper application of existing standards and guid- ance, and assess the level of observable data to improve the visibility of interconnections between banks and NBFIs.
Specifically, the Committee stated: “Banks engage with NBFIs across a wide range of transactions. Common NBFI counterparties for banks are investment and pension funds as well as insurance companies and broker-dealers.
“Banks’ exposures to NBFIs include traditional credit facilities such as credit lines and fully collateralised short-term wholesale loans. Banks are also exposed to NBFI counterparties through more complex instruments in the areas of derivatives and securities financing, leveraged lending and prime brokerage, which may give rise to counterparty credit and liquidity risks with concentration, illiquidity and leverage as key considerations.
“Supervisors consider bank exposures to highly leveraged counterparties involving derivatives and securities financing transactions to be the riskiest. These types of exposures raise concerns about opaque concentration risks and potential sudden market stress, stemming from margin calls and fire sales of assets. In some instances, supervisors also note an increasing risk with regards to cryptoassetrelated services provided by NBFIs.”
While noting that existing supervisory infrastructure regarding NBFI-related risk is “generally sufficient,” the Committee said it is discussing, including through other international forums, “how to close data gaps and improve the visibility of interconnections between banks and NBFIs.”
According to the publication, “the Committee strongly encourages the proper application of existing standards and guidelines, as well as the full and timely implementation of the Basel III standards. It is committed to continuing to exchange supervisory views on banks’ exposures to NBFIs including on recent episodes highlighting leverage, concentration and liquidity concerns in the non-bank sector and related supervisory practices.
In addition, the Committee continues to contribute to the Financial Stability Board’s work on assessing and addressing the risk from NBFIs.”