(Nov 19): Global watchdogs will move to rein in leverage at non-banks early next year, the Financial Stability Board promised on Monday, more than a year after its chair signaled a probe into mounting borrowings at hedge funds, private capital markets and others.

“By early 2025 the FSB will publish a consultation report with proposed policy recommendations for authorities to monitor vulnerabilities and use policy measures to address systemic risk from NBFI leverage,” the FSB said in its annual report released ahead of this week’s meetings of the Group of 20 nations.

The Basel, Switzerland-based body was referring to the continued evolution and growth of non-bank financial intermediaries, a label that covers investment funds, insurance companies and others outside the banking sector that now hold almost half of the world’s financial assets. In particular, it called out private credit as an area of interest, owing to its rapid growth and “increasing evidence of its connections with the banking system and with institutional investors.”

Regulators have escalated warnings about private credit valuations in recent months amid fears that funds are concealing the true health of their loan books. A boom in the so-called significant risk transfer market, where private credit funds have been assuming exposure to banks’ troubled loans, has prompted the International Monetary Fund to flag concerns over potential financial stability risks.

“Private credit funds are exposed to credit risk, leverage and liquidity vulnerabilities, but their opacity makes it difficult to assess them,” the FSB said, though it didn’t specify any particular measures that might affect that sector.

Policy proposals from the FSB, which was founded in the aftermath of the great financial crisis to prevent future calamities, typically take years to be adopted by individual jurisdictions, and even then, their adoption can be patchy.

“Vulnerabilities in NBFI, including pockets of hidden or excess leverage, remain a potential source of systemic risk,” the FSB wrote. “Combined with rich asset valuations in some markets, there is the potential for sharp price corrections 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 chair and Dutch central bank governor Klaas Knot, implored global leaders to get behind the work on NBFIs, and to also follow through on promises already made, including implementing the final post-crisis bank capital rules.

“Your continued support will be crucial in the period ahead as the FSB works through its members to advance policy work in key areas and to promote full, consistent, and timely implementation of agreed reforms,” Knot said, warning that there was “no room for complacency.”

Knot, who completes his term in June, last month lamented the waning political support for financial regulation, and warned leaders at the IMF they could face “economies in free fall” if they failed to sharpen their focus.

The FSB published several measures on NBFI in 2024, including around liquidity mismatch in open-ended funds and enhancing non-banks’ preparedness to meet margin and collateral calls.

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