Michael LewisSarah Pritchard of the FCA has spoken to the Investment Association Roundtable event. She looked at the FCA’s approach to non-bank leverage. She focussed on how targeted improvements to public and private disclosure can significantly help to mitigate the build up of systemic risk from NBFI leverage. The FCA is working internationally on this, including co-chairing an FSB working group.
She stressed that leverage is of course not inherently a cause for concern, but that its presence can create vulnerabilities – so it is important to anticipate when it may cross the line from investment risk into systemic risk and deal with it accordingly. The first line of defence is for the NBFIs themselves to manage their own investment risk, and to do this they need access to the right data. The second line is counterparty credit risk management – but this has in the past failed to stop risks from crystallising, again partly because of lack of the right information. So the key is to get the balance right between having information available without making the NBFIs disclose proprietary information about their investment strategies.
Regulators will be looking at a number of metrics to help understand where the risks are and looking at the risks of individual NBFIs and the sector generally. The FCA plans to focus on fund managers in an exercise to understand whether it has the right data and tools to perform its role as third line of defence. As part of that review it will consider whether it needs to make some targeted changes to its data collection requirements.