Speech

As prepared for delivery

Dear colleagues,

It is a great pleasure to be here at the 24^th Annual International Conference on Policy Challenges for the Financial Sector, organized by the IMF and the World Bank. You have discussed several important topics, such as:

• The risks to global financial stability and the broader outlook;
• Liquidity risk; and
• The supervision of financial conglomerates.

To complement these discussions, I will focus on an area where effective surveillance and supervision are vital: non-bank financial intermediation, or NBFI.

NBFI is a heterogeneous and complex space that has grown rapidly in terms of size and interconnectedness.

Any discussion on NBFI should begin with a clear definition of what we are talking about.

While it encompasses all forms of financial intermediation carried out by non-banks, from a financial stability perspective, it is most relevant to focus 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.

This includes hedge funds and other leveraged investment funds. While it typically excluded traditional insurers and pension funds, structural shifts in business models—partly driven by the low-yield environment—have brought some of their risk characteristics closer to those of leveraged NBFIs.

Since the global financial crisis, the NBFI sector has expanded faster than the global banking sector, grown in scope and complexity, and has been a key driver of the deepening of global capital markets.

The Financial Stability Board’s latest Global Monitoring Report on NBFI notes that the sector held or intermediated nearly half of all global financial assets by end-2023.

Equally impressive is the acceleration of financial interconnectedness—between NBFIs, with other NBFI entities, with the banking system, and with the real economy—both domestically and across borders.

Financial Stability Challenges

The associated financial stability challenges have risen, though they remain difficult to assess and manage due to data and regulatory gaps.

Banks’ exposures to NBFI raise several financial stability implications. NBFI generally obtain leverage from banks. For example, hedge funds obtain leverage via repos and derivatives, while other private firms also receive credit lines. Hence, the counterparty risk management of banks is key to managing the overall leverage of NBFI.

Liquidity stress in the NBFI sector can quickly propagate to the banking system through rapid calls on banks’ liquidity lines, as well as to core funding markets that are central to global risk pricing.

• In our April 2025 Global Financial Stability Report, we highlighted how hedge funds rely on banks for over half of their funding, increasing banks’ exposure to leverage and interconnectedness.
• Asset managers increasingly use leverage to take long futures positions in Treasuries and equities, rather than trading these securities in the spot market.
• This creates arbitrage opportunities for leveraged investors, including hedge funds, who take the short side of the futures trades, and combine it with repo-financed holdings of Treasury bonds, in so-called leveraged basis trades. A sudden increase in repo rates makes the trade unprofitable even as Treasury market volatility leads to higher margin calls, forcing rapid unwinding of these trades.
• This can amplify volatility and illiquidity in core markets, as seen in March 2020 in the U.S. Treasury market and in September 2022 in the U.K. gilt market.

Many NBFI are not subject to comprehensive disclosure requirements. This makes it difficult for banks to assess aggregate exposures, concentrations, or correlations across markets and counterparties.

The challenge is that banks manage their counterparty risk exposures but also compete for trading and custody business among each other. Hence, there can be a race to the bottom in margins and haircuts which can ultimately put the NBFI system at risk of deleveraging cycles.

The lack of comprehensive data on banks’ risk exposures on NBFI as a sector hampers banks’ risk management, especially when counterparties use complex business strategies and hold positions that rely on model-based valuations.

• The failure of the family office Archegos in 2021 is a compelling illustration of systemic vulnerabilities of banks to such NBFI. Banks underestimated their aggregate exposure to Archegos, which had built concentrated derivatives positions.
• When the value of these positions dropped abruptly, Archegos was unable to meet sharply higher margin calls. When banks liquidated their hedged positions simultaneously in response, they realized large losses.
• The incident underscored deficiencies in disclosure, risk reporting and management by NBFI and the need for regulators to enhance supervisory oversight of systemic risks. While the Archegos failure had only limited systemic consequences, such a failure in the midst of broader market stress could generate more meaningful system-wide adverse consequences.

Policy and Supervisory Priorities

A key priority is to close data gaps. NBFI reporting, which is often voluntary, is also less granular and consistent, limiting supervisors’ ability to identify risks.

A second priority is to limit regulatory arbitrage. For example, when NBFI entities engage in bank-like activities, it is important to ensure that their activities remain within the regulatory perimeter. In turn, banks may have incentives to arbitrage regulations themselves, by creating non-bank subsidiaries. This type of regulatory arbitrage was a key vulnerability in the lead up to the 2008 crisis, and signs of a resurgence of such structures have been re-emerging in recent years.

A third priority is to maintain an appropriate balance between entity-based and activity-based regulation, with a dynamic regulatory scope to capture emerging forms of intermediation, such as fintech firms that engage in bank-like activities.

A fourth priority is to strengthen supervisory cooperation across sectors and borders. Given the growing interconnectedness and global nature of many NBFI activities, coordinated cooperation agreements and timely data-sharing are vital to a holistic supervisory perspective.

Policy Responses and International Progress

Let me start with the work of the Financial Stability Board (FSB) and sectoral standard setting bodies.

• Since the global financial crisis, the FSB and international financial standard setters have strengthened the global regulatory architecture.
• The FSB has led efforts to enhance resilience in the asset management sector, including reforms to liquidity risk management in money market and investment funds.
• Together with the International Organization of Securities Commissions (IOSCO), the FSB is analyzing options to enhance the resilience of funding markets—including commercial paper, certificates of deposit, repo, corporate bonds, and sovereign bond markets—that are vital for global financial intermediation.
• The Basel Committee on Banking Supervision (BCBS) responded to lessons from Archegos with new counterparty credit risk management guidelines in December 2024.
• The BCBS’ Revised Core Principles for Effective Banking Supervision (the new Basel Core Principles, issued in April 2024) include provisions that enhance oversight of NBFI-related risks, including in relation to macroprudential aspects of supervision, corporate governance and risk management frameworks, and business model sustainability.
• Looking ahead, the BCBS work program for 2025-26 includes a deep dive into bank-NBFI interconnections.

The Role of the IMF

The IMF supports this agenda through surveillance, capacity development, and policy advice. And we do our part in promoting the effective regulation and supervision of NBFI through several key products and outputs.

• The IMF Financial Sector Assessment Program (FSAP) has deepened its coverage of NBFI, and its linkages with the banking system.
• FSAPs analyze systemic risk and assess the policy framework and tools in key NBFI sectors, such as insurance, asset management and securities markets.
• Our Global Financial Stability Report has featured in-depth analysis of risks in investment funds, insurance, leverage in financial markets, and private credit.
• The complementary Global Financial Stability Notes explored vulnerabilities in life insurance and pension businesses.
• We complement our surveillance through capacity development—through regional training and bilateral technical assistance.

Across these efforts, we emphasize three 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 serves its membership by collaborating closely with the relevant standard setting bodies, FSB, BCBS, IOSCO, Internal Association of Insurance Supervisors—in order to develop policy frameworks, assess adherence to standards, and build capacity in member countries’ regulatory agencies. Such work on financial stability continues to be core to the broad macro-financial stability mandate of the IMF. We look forward to continued engagement with our membership.