Global policy group details recommendations for dealing with risks to financial stability.

As part of its ongoing efforts to address the risks posed by the growing shadow banking sector, the Financial Stability Board (FSB) is recommending a series of policy measures to deal with the financial stability threats created by leverage in the sector.

In a new report, the FSB outlined its recommendations for regulators and policymakers to address leverage risks at non-bank financial institutions.

Previously, the FSB found that leverage played a significant role in recent episodes of market stress — including the financial turmoil at the onset of the pandemic in March 2020, the collapse of the Archegos hedge fund, stress in commodities markets in 2022, and the U.K. Treasury market crisis in 2023.

In response to these events, various authorities — including the Basel Committee on Banking Supervision, the International Organization of Securities Commissions (IOSCO) and the Committee on Payments and Market Infrastructures (CPMI) — have already taken policy action to address the vulnerabilities exposed by these episodes.

While those efforts are expected to address some leverage risks, the FSB said its new recommendations are designed to deal with risks that remain or could emerge in the future.

The group’s recommendations, delivered to the G20, “set out an integrated approach for addressing financial stability risks created by shadow bank leverage,” the FSB said.

“It focuses on those risks that may arise in financial markets that are at the core of the financial system and whose functioning is essential for the real economy, and risks that may arise through interlinkages between leveraged non-banks and systemically important financial institutions in their role as leverage providers,” it noted.

The recommendations cover risk identification and monitoring, the use of leverage in core financial markets, gaps in the regulatory approach, counterparty credit risk management, and cross-border cooperation. They also aim to provide flexibility for local authorities to select, design and calibrate policy measures appropriate to their specific markets.

The FSB said the recommendations are part of its broader work to address risks posed by the large and growing shadow banking sector.

With the policy proposals finalized, the FSB said it will now work with global standard setters to support implementation across various markets.

Alongside the report outlining its recommendations, the FSB also published a progress update on efforts to improve the resilience of the shadow banking sector since the global financial crisis, as well as a report addressing gaps in available data.