Zurich is known as one of the world’s leading financial centers, and with the recent recommendations from the Financial Stability Board (FSB), it is clear that the city is committed to maintaining its position. On Wednesday, the FSB presented a series of recommendations to governments, aimed at reducing risks associated with non-bank financial intermediaries such as hedge funds and insurers. These intermediaries now account for almost half of global financial assets, and their growth has been unprecedented in recent years.
According to the FSB, the sector of non-bank financial intermediation has grown by a staggering 130% between 2009 and 2023. While this growth has undoubtedly boosted financial markets, it has also made them more vulnerable to stress events. This is why the FSB, which serves as the G20’s financial risk watchdog, believes it is crucial for governments to take action and implement these recommendations.
John Schindler, the FSB Secretary-General, emphasized the importance of managing the increased complexity and interconnectedness in the financial system. He stated, “This growth comes with an increase in complexity and interconnectedness in the financial system, which, if not properly managed, can pose substantial risks to financial stability.”
The FSB’s consultation report highlights a few key areas that need to be addressed in order to reduce risks in the non-bank sector. One of these is the need for domestic frameworks to identify and monitor financial stability risks related to non-bank leverage. This will help governments and institutions better understand and manage the risks associated with these intermediaries.
Another important recommendation calls for policy measures to be selected, designed, and calibrated to mitigate the identified financial stability risks. This requires a proactive approach from governments, who must carefully consider and implement these measures to ensure the stability of their financial systems.
The FSB also stressed the importance of timely and thorough implementation of the Basel Committee on Banking Supervision’s revised guidelines for counterparty credit risk management. This will help mitigate the risks associated with credit exposure between financial institutions and non-bank intermediaries.
In addition to these measures, the FSB also proposes increasing private disclosure practices in the non-bank sector. This will allow for greater transparency and accountability, ultimately promoting a healthier and more stable financial system. The adoption of the principle of “same risk, same regulatory treatment” is also recommended to address any regulatory inconsistencies and ensure a level playing field for all financial institutions.
Lastly, the FSB is calling for improved cross-border cooperation and collaboration. With the global interconnectedness of financial markets, it is essential for governments and institutions to work together to address risks and maintain financial stability.
The consultation report is now open for comments from member governments and institutions. The FSB is eager to gather feedback and suggestions to improve the recommendations before releasing a final report in mid-2025. This demonstrates the FSB’s commitment to ensuring a thorough and collaborative approach towards mitigating risks in the non-bank sector.
In conclusion, Zurich and the FSB are taking proactive measures to reduce risks in the non-bank financial intermediation sector. By implementing these recommendations, governments and institutions will be able to better manage the growing complexity and interconnectedness in the financial system. This will ensure a stable and resilient financial market, benefiting not only Zurich but the global economy as a whole.
