March 4, 2025 - The LSTA recently responded to the Financial Stability Board (FSB)’s consultation on leverage in non-bank financial intermediation (“NBFI”). The consultation sets out the FSB’s analysis and proposed policy recommendations designed to address potential financial stability risks arising from leverage in NBFI. 

In its response, the LSTA highlighted that:

• NBFI is incredibly diverse and therefore ill-suited for broad policy recommendations
• It is critical that the many benefits of NBFI activity are preserved
• Extreme care must be taken with respect to any new measures 
• Two policy principles should be incorporated into the FSB’s final recommendations: measures must be well-tailored and take a proportionate approach – proportionate to the risk(s) posed with maximal retention of the benefits of the target activity/entity.
• Use of leverage is a beneficial activity which enhances efficiency and supports liquidity and, in many cases, increases investor returns.
• Not all leverage is created equal – the source of leverage is as important as the headline number 
• Private corporate credit is a strong example of where NBFI activity does not threaten financial stability. The small relative size of the private corporate credit, its modest use of stable leverage, and the critical role it plays in capital formation weigh against new measures. 
• Any risk metrics underpinning these policy recommendations must be well-defined and appropriate to measure the specific financial stability risk(s) being targeted
• Public consultation on any new measure or metric proposed is essential

Once the FSB has reviewed the public comments, it will proceed to publish its final policy recommendations on leverage in NBFI. The FSB’s goal is that those policy recommendations then inform future policymaking by each participating regulatory body. 

For more information, please contact Tess Virmani.