The bad habits of NBFIs are a growing threat to the global financial system, watchdog warns

The Financial Stability Board (FSB) is urging global financial regulators to tighten their grip on non-banking financial institutions (better known as NBFIs). Klass Knot, the FSB chair whose name might make for a good Bond villain, expressed the worries in a letter to G20 finance ministers and central bank governors ahead of their Rio de Janeiro meeting later this week, the Financial Times reports. Knot wants regulators to step up both the rollout of tighter rules and enforcement. You can read the full letter here.

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IN CONTEXT- No fire without a spark: The FSB, a key international watchdog, has been concerned about the risks posed by NBFIs since a March 2020 meltdown triggered when debt-laden hedge funds pile into cash (and sold down other assets) as the covid-19 crisis set it.

Detractors call NBFIs “shadow banks,” and Knot thinks they control AUM worth USD 218 tn — nearly half of all assets in the global financial system, exposing everyone to the risks posed by the heavily indebted sector, according to the salmon-colored paper.

THE CULPRIT- Higher leverage + less oversight and low transparency: NBFIs including hedge funds and finance companies have been “taking on additional leverage through off-balance sheet exposures, including foreign exchange swaps and forwards” that has “grown significantly over the past decade,” said Knot.

The problem: Unlike banks, which are heavily regulated, NBFIs often operate with higher leverage and less oversight, making them more susceptible to financial shocks.

The pitch: The FSB wants to see regulators demand NBFIs hold more liquid assets and engage in regular stress tests — and impose tighter rules on redemptions at money market funds.

Why the FSB matters: The body was set up in the aftermath of the 2008 global financial crisis to monitor and make recommendations about the global financial system. Its primary purpose is to coordinate national financial authorities and international standard-setting bodies to develop and promote the implementation of effective regulatory, supervisory, and other financial sector policies. It’s quasi-governmental: The FSB is made up of the central bank governors and finance ministers of major economies, along with international financial and economic bodies such as the IMF, and the World Bank. FSB has no legally binding powers of its own.

MARKETS THIS MORNING-

To indulge in the armchair analysis that the financial press loves to fall back on when looking at how markets are moving: Asian investors are mixed on the prospect of Kamala Harris as the Democratic nominee for this fall’s elections. Shares are up in early trading in Australia, Japan, and South Korea (all key US allies in Asia), while the Shanghai Composite is down and Hong Kong’s Hang Seng is flat.

Wall Street welcomed Joe Biden’s decision to step down, with the Dow, S&P 500, and Nasdaq all rising. US and European equities futures were up in overnight trading.

THE CLOSING BELL-

The EGX30 rose 0.7% at yesterday’s close on turnover of EGP 4.8 bn (22.9% above the 90-day average). Local investors were the sole net sellers. The index is up 16.5% YTD.

In the green: Madinet Masr (+5.7%), Egypt Kuwait Holding (+3.5%), and AMOC (+2.9%).

In the red: GB Corp (-4.1%), Orascom Development (-3.5%), and Palm Hills Development (-2.1%).

CORPORATE ACTIONS-

Heliopolis Housing and Development is paying out a dividend of EGP 1.34 per share on its 2023 earnings, after its general assembly approved the move, it said in an EGX disclosure (pdf). The dividends will be distributed in a single installment within a month.