BIS Chief Advocates Limitations on NBFI Leverage in Bond Markets
Non-bank financial institutions (NBFIs) are known for their active participation in bond markets. Their use of leverage has increased, which could potentially pose significant stability risks. This has prompted a call for restrictions from the general manager of the Bank for International Settlements (BIS).
Greater Central Clearing and Minimum Haircuts on Repos to Mitigate Risks
During a speech at the London School of Economics, Pablo Hernández de Cos, the general manager of BIS, emphasized the need to employ greater central clearing and establish minimum haircuts on repos for risk reduction purposes. His comments highlight the growing concerns about the vulnerability of the global financial system to potential shocks from the bond markets.
The Increasing Presence of NBFIs in Bond Markets
NBFIs have been progressively more active in the bond markets. As sovereign debt levels across advanced economies have escalated and banks have scaled back their activities due to balance sheet considerations, NBFIs have stepped in to fill the void. This shift has increased the potential for a systemic risk, particularly if market conditions become volatile.
Regulation and Oversight to Ensure Financial Stability
The BIS, often referred to as the central bank for central banks, has been monitoring these developments closely. As a result, it has advocated for enhanced regulation and oversight to ensure financial stability. The emphasis on greater central clearing and minimum haircuts on repos is in line with this stance, as these measures are designed to mitigate the potential risks of excessive leverage by NBFIs.
Reshaping the Financial Landscape
The call for limits on NBFI leverage in bond markets is a significant development. It underscores the changing dynamics of the global financial system and the need for regulatory frameworks to adapt accordingly. As NBFIs continue to grow their footprint in the bond markets, efforts to manage the associated risks will likely remain a key focus for central banks and other regulatory authorities.
For more details, click Here.
About the BIS and Its General Manager
The BIS is an international financial institution that serves as a bank for central banks. The organization’s mission is to serve central banks in their pursuit of monetary and financial stability and to foster international cooperation in these areas. Pablo Hernández de Cos, the general manager of BIS, has been instrumental in identifying and addressing potential risks in the global financial system.
