Banks and Non-Banking Financial Institutions: the IOSCO Perspective

This is the keynote speech given by Jean-Paul Servais, FSMA and IOSCO Board Chair, at the BFF-SUERF Conference "Banks and Non-Banking Financial Institutions" (20 January 2025, Brussels). The speech focused on international cooperation as a key element to successfully addressing financial stability risks from non-bank financial intermediation (NBFI), and in particular on the partnership between the International Organization of Securities Commissions (IOSCO) and the Financial Stability Board (FSB). A resilient non-bank sector leads to greater confidence in capital markets.

One of my key priorities as IOSCO Chair has been the strengthening of the non-bank financial intermediation (NBFI) framework.

Today I am proud to say that IOSCO has been able to achieve a lot in this area these last few years. In cooperation with the FSB, we have made a lot of progress in delivering policy solutions.

Intensifying international collaboration

The outcome of this work is the fruit of a successful international collaboration between different authorities from across the globe: international organisations and standard setters, central banks, securities regulators, prudential regulators... Each authority brings its own expertise to the table.

This international collaboration between authorities with different mandates is a key element to successfully addressing financial stability risks from NBFI.

NBFI is inherently diverse. In addition, financial intermediation does not stop at the borders, nor do its risks.

None of us can address the financial stability risks of NBFI on their own. To address NBFI risks we need to intensify international cooperation, even in a more challenging geopolitical context

The same is true at the national level. Belgium is an excellent example of national cooperation in this regard. The FSMA and the National Bank of Belgium cooperate very well on NBFI matters. Both institutions are committed to monitor and address financial stability risks from NBFI.

On 13 January this year, we published our sixth joint report on the monitoring of asset management and NBFI, as part of this commitment.

Bolstering trust in capital markets

In the EU, the funding of European SMEs, growth companies and infrastructure through capital markets is high on today’s political agenda. To ensure that funding through capital markets is stable, it is of vital importance that NBFI is resilient.

We cannot take financial stability and NBFI resilience for granted. This has been illustrated by a number of incidents and events these last few years: the failure of Archegos, the stress episode in the UK gilt market, the commodities market shock, and of course the March 2020 market turmoil.

Reducing systemic risks is one of the three objectives of IOSCO’s Principles of securities regulation. This objective becomes even more important as more retail investors participate in capital markets.

An increased retail investor participation can be achieved only when investors are sufficiently confident about the stability of financial markets.

Recent measures and new proposals seek to reinforce resilience of NBFI and thereby bolster that trust of investors. Let me be clear, there is no conflict between the objective of enhancing NBFI resilience and the objective of increasing funding through capital markets. Addressing financial stability risks from NBFI is a prerequisite to achieve the objectives of the Savings and Investment Union (SIU).

Partnership between IOSCO and the FSB

Over the past few years, IOSCO has been committed to strengthen its partnership with the FSB and to deliver policy proposals to address vulnerabilities from NBFI.

The March 2020 market turmoil marked a turning point in this regard. It was the catalyst for an ambitious working programme, focused on aspects related to liquidity and the use of leverage by NBFIs.

Liquidity risk management in open-ended funds

A key policy deliverable has been the development of a framework to strengthen liquidity risk management in open-ended funds. Just over a year ago, the FSB and IOSCO jointly published two policy documents that aim to achieve this goal ^{(1), (2)}.

IOSCO especially encouraged a greater use and consistency in the use of anti-dilution liquidity management tools (LMTs).

Anti-dilution LMTs are a crucial element of the policy framework to address liquidity mismatch in funds. The enhanced use of anti-dilution LMTs aims to both strengthen investor protection and to safeguard financial stability. The use of anti-dilution LMTs mitigates investor dilution and thereby also the potential first-mover advantage arising from liquidity mismatch.

In November last year, IOSCO also published a consultation report seeking feedback on a proposal to update its Liquidity Risk Management Recommendations for Collective Investment Schemes. This update is meant to further operationalise the revised FSB Recommendations, and builds on lessons learnt from market events that took place after the initial publication of the IOSCO Recommendations in 2018.

The proposed update incorporates, among others, a categorisation approach for open-ended funds based on the liquidity of their assets. It also encourages the implementation of a broad set of liquidity management measures.

NBFI leverage

Last year, we turned our focus to leverage. In December, the FSB published a proposal with policy recommendations that could considerably improve our capacity to monitor and mitigate financial stability risks from leverage in NBFI.

A main concern that emerged in recent years is the extent to which leverage is ‘hidden’, and the consequences this may have on financial stability.

The proposed recommendations address this concern by proposing a package of recommendations, including:

1. a framework for authorities to identify and monitor vulnerabilities from NBFI using a toolkit of metrics;
2. a review of public and private disclosures.

It is important that leverage providers receive sufficient information from NBFI entities to enable a sound credit risk management. This includes, for instance, information on the aggregated exposures managed by the NBFI entity. Such information should allow leverage providers to assess risks from concentrated and large exposures, such as those we have seen in the case of Archegos. The consultation report also proposes recommendations to address financial stability risks from NBFI. These include a review of activity-based and entity-based measures.

The combination of activity-based measures and entity-based measures is extremely important. As I mentioned earlier, NBFI is very diverse. Activity-based measures can be used to target highly leveraged strategies employed by NBFI entities subject to different regulatory frameworks or even outside the regulatory perimeter. Examples of activity-based measures are minimum haircuts, enhanced margin requirements and central clearing mandates.

The report is recommending a range of policy tools that authorities can choose from to address leverage risks in their jurisdiction. The inherent diversity within NBFI and across jurisdictions asks for a tailored approach. The precise package of measures needs to be proportionate to the nature of risks posed by NBFI. To assist authorities in the selection, design and calibration of policy measures the report contains a set of guiding principles.

In addition, the report also contains a specific recommendation to address inconsistencies across different types of NBFI entities by adopting the principle of “same risk, same regulatory treatment”.

This approach ensures that the outcome will be both tailored and consistent across jurisdictions.

I would also like come back to a point I made at the beginning of my intervention: none of us can address financial stability risks on their own. Risks from NBFI leverage may emerge from other jurisdictions. Likewise, NBFI leverage may impact markets in other jurisdictions. We therefore need to enhance cross-border cooperation and coordination.

Non-bank data challenges

Finally, I would like to say a few more words on the data challenges.

Today, regulators have made the transition to data-driven supervision. To be able to implement this, we need sufficiently granular and qualitative data, and we need to continuously optimise our data processing capacities.

This also holds true with respect to financial stability risks of NBFI and IOSCO stands ready to work on this together with FSB.

This does not mean that we are not aware that market participants are already subject to a high reporting burden today. I believe that we indeed need to look into ways to reduce this burden. We could do so, for example, by developing more uniform templates across reporting regimes or by exploring the possibility of collecting more raw granular data instead of calculated and processed data.

“Overcoming data challenges” does not equal “more reporting” by definition.

Yet, this does not mean that new reporting obligations that would enhance the monitoring of financial stability risks are ruled out either. In any case, a reduction of the reporting burden is likely to be a net reduction instead of a blunt cutback.

Streamlining reporting requirements and mitigating financial stability risks go hand in hand.

Endnotes

⁽¹⁾ FSB, Revised Policy Recommendations to Address Structural Vulnerabilities from Liquidity Mismatch in Open-Ended Funds: Final Report, December 2023.

⁽²⁾ IOSCO, Anti-dilution Liquidity Management Tools – Guidance for Effective Implementation of the Recommendations for Liquidity Risk Management for Collective Investment Schemes: Final Report, December 2023.