The Bank of International Settlements (BIS) called for a “macroprudential” regulatory approach to non-bank financial intermediaries (NBFIs), warning that these firms can can amplify market stress and undermine financial stability.

In its latest Quarterly Review, the bank said that NBFIs currently account for nearly half of all global financial assets and that while they provide a valuable source of alternative financing, they also give rise to new channels of instability.

It added that an industry-wide regulatory system is needed to address structural vulnerabilities in these non-bank companies, identifying liquidity mismatches and hidden leverage as some of the biggest issues.

The BIS said that market volatility in March 2020 exposed gaps in regulation and highlighted risks posed by NBFIs in Asian emerging market economies and in fast-growing areas like sustainable finance and the crypto universe.

BSI general manager Agustín Carstens called for a multi-pronged policy response that mirrors the regulatory reforms established in the wake of the financial crisis.

“Those reforms strengthened banks and reduced their systemic impact,” said Carstens. “It is time to apply a macroprudential approach to NBFIs as well.”

He suggested the industry gather better information through stronger monitoring, enhanced regulatory reporting, and public disclosures.

“Another [approach] would be to ensure that NBFIs build war chests in good times in order to mitigate collective retrenchment in times of stress,” he added. “Ultimately, a more consolidated supervisory perspective would be necessary.”

The BIS review also pushes for regulation of decentralised finance (DeFi), a new cryptocurrency intermediation that uses automated protocols on blockchains and stablecoins to carry out fund transfers. The bank said that although links with traditional finance are currently contained, because of high leverage, limited shock-absorbing capacity, and built-in interconnectedness, the process needs closer moderation.

The publication also discusses the systemic risks of open-ended bond funds, stating that during recent periods of stress, elevated redemptions spread across funds, and that macroprudential tools are needed to "bolster their resilience".

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