Luncheon Keynote Address at the 24th Annual IMF-World Bank International Conference on Policy Challenges for the Financial Sector
IMF News, June 13, 2025
Source details
- Canonical URL
- Luncheon Keynote Address at the 24th Annual IMF-World Bank International Conference on Policy Challenges for the Financial Sector
Other formats
Bibliographic details
- Published: June 13, 2025
Context and focus
- Speaker: Tobias Adrian, IMF Financial Counsellor and Director of the Monetary and Capital Markets Department
- Event date: June 13, 2025
- Primary focus: non-bank financial intermediation (NBFI) and its implications for financial stability, surveillance, and supervision.
Definition and scope of NBFI
- NBFI described as heterogeneous and complex; rapid growth in size and interconnectedness.
- From a financial stability perspective, emphasis on entities that:
- Engage in liquidity and maturity transformation
- Use leverage
- Are highly interconnected with major financial intermediaries such as banks
- Play a vital role in liquidity provision in core funding markets
- Examples and borderline cases:
- Includes hedge funds and other leveraged investment funds
- Typically excludes traditional insurers and pension funds, but structural shifts (partly driven by the low-yield environment) have brought some of their risk characteristics closer to those of leveraged NBFIs
Key statistics and market developments
- Since the global financial crisis, the NBFI sector has:
- Expanded faster than the global banking sector
- Grown in scope and complexity
- Been a key driver of the deepening of global capital markets
- Financial Stability Board’s latest Global Monitoring Report on NBFI: the sector held or intermediated nearly half of all global financial assets by end-2023
- IMF Global Financial Stability Report (April 2025) highlighted that hedge funds rely on banks for over half of their funding
Financial stability challenges and transmission channels
- Main challenges:
- Data and regulatory gaps make assessment and management difficult
- Banks’ exposures to NBFI create financial stability implications because NBFI generally obtain leverage from banks (e.g., hedge funds via repos and derivatives; private firms via credit lines)
- Liquidity stress in NBFI can propagate quickly to the banking system through rapid calls on banks’ liquidity lines and to core funding markets
- Market mechanics and amplification:
- Asset managers increasingly use leverage to take long futures positions in Treasuries and equities instead of spot trades
- Leveraged basis trades: arbitrage where leveraged investors short futures and finance long Treasury holdings with repo; a sudden increase in repo rates and higher margin calls can force rapid unwinds
- Historical episodes: March 2020 U.S. Treasury market volatility and September 2022 U.K. gilt market stress demonstrated amplification and illiquidity effects
- Information and risk-management gaps:
- Many NBFI lack comprehensive disclosure requirements, complicating banks’ ability to assess aggregate exposures, concentrations, or correlations
- Competitive pressures among banks for trading and custody business can produce a "race to the bottom" in margins and haircuts, increasing fragility
- The failure of Archegos in 2021 illustrated systemic vulnerabilities: concentrated derivatives positions, underestimation of aggregate exposures by banks, inability to meet margin calls, simultaneous liquidations generating large losses
- The Archegos failure had limited systemic consequences in isolation, but similar failures amid broader market stress could generate system-wide adverse outcomes
Policy and supervisory priorities
- Four key supervisory priorities identified:
- Close data gaps: improve NBFI reporting, increase granularity and consistency
- Limit regulatory arbitrage: ensure bank-like activities by NBFI remain within the regulatory perimeter and guard against banks creating non-bank subsidiaries to arbitrage regulations
- Balance entity-based and activity-based regulation: maintain dynamic regulatory scope to capture emerging forms of intermediation (e.g., fintech firms engaging in bank-like activities)
- Strengthen supervisory cooperation across sectors and borders: coordinated cooperation agreements and timely data-sharing to address global interconnectedness
Policy responses and international progress
- International bodies and recent developments:
- Financial Stability Board (FSB) has led efforts to enhance resilience in the asset management sector, including reforms to liquidity risk management in money market and investment funds
- FSB and IOSCO are analyzing options to enhance resilience of funding markets (commercial paper, certificates of deposit, repo, corporate bonds, and sovereign bond markets)
- Basel Committee on Banking Supervision (BCBS) issued new counterparty credit risk management guidelines in December 2024 in response to lessons from Archegos
- BCBS’ Revised Core Principles for Effective Banking Supervision (the new Basel Core Principles), issued in April 2024, include provisions enhancing oversight of NBFI-related risks (macroprudential aspects of supervision, corporate governance and risk management frameworks, business model sustainability)
- BCBS work program for 2025-26 includes a deep dive into bank-NBFI interconnections
The IMF’s role and tools
- The IMF supports the agenda through surveillance, capacity development, and policy advice:
- IMF Financial Sector Assessment Program (FSAP) has deepened coverage of NBFI and its linkages with the banking system; FSAPs analyze systemic risk and assess policy frameworks and tools in key NBFI sectors (insurance, asset management, securities markets)
- Global Financial Stability Report: in-depth analysis of risks in investment funds, insurance, leverage in financial markets, and private credit
- Global Financial Stability Notes: explored vulnerabilities in life insurance and pension businesses
- Capacity development: regional training and bilateral technical assistance
- Across IMF efforts, three emphasized recommendations:
- More intrusive and risk-based supervision
- Better data and reporting requirements
- Closer attention to liquidity and conduct risks in private credit funds
Conclusion
- The IMF collaborates with standard setting bodies (FSB, BCBS, IOSCO, International Association of Insurance Supervisors) to develop policy frameworks, assess adherence to standards, and build capacity in member regulatory agencies
- Financial stability work remains core to the IMF’s macro-financial stability mandate and the IMF looks forward to continued engagement with its membership
As prepared for delivery, Tobias Adrian, June 13, 2025