Sarah Pritchard of the FCA has published a blog of her thoughts on use of leverage by non-bank financial institutions. She notes it is critical to the UK economy that these NBFIs are resilient and financially stable. They can achieve leverage through many techniques, from loans through to complex derivatives.
She said that in good times this leverage provides extra depth to the system and helps maximise returns, but in stressed times poorly managed, concentrated or hard to spot leverage can increase instability.
The FSB has made recommendations to help it identify and address systemic risks, which focus on improving how firms share critical information. The FCA now has a particular focus on how it collects and uses data that will help it spot risks early.