Fixing Information Gaps: A Legal Highs Approach to NBFIs

Authored by: Adrian KubiakOscar BradshawRyan BuntonNivedita DileepJosephine KelwayHubert KucharskiCass H. LeaftleyPhoebe Skidmore.

Published 2 months(s) ago.

Abstract:

Our report aims to address the data provision and information challenges that financial regulators face in the Non-Bank Financial Institution (NBFI) sector. To do so, we split our analysis into two parts. First, to give our readers adequate information regarding the inner workings of the NBFI sector and its significance to macroeconomic stability, we provide a high-level overview of the shadow banking sector. Here, our report covers maturity and liquidity transformation, explaining how they can cause first-mover advantages, whilst using Open-End Funds and Money Market Funds as examples of the use of these mechanisms. Afterwards, we analyse what leverage is and its potential destabilising impacts, using Archegos Capital and Liability-Driven Investments as case studies of the deployment and effects of both synthetic and financial leverage. The report then also explores international interlinkages between shadow banks, as well as the national interlinkages between the traditional banking and the shadow banking sector, emphasising the potential for systemic risk. Then second, our report provides a blueprint for regulators to construct a framework on data collection. To enrich this proposal, we first outline the role of stress testing and provide context on future stress testing of the non-bank financial sector. Then, we propose a regulatory framework for Non-Banking Financial Institutions inspired by Britain's Psychoactive Substances Act where we classify each institution into specific categories with tailored data-reporting standards, incentivising adherence through punitive measures for non-compliance, while also encouraging collaboration between regulators and firms for financial innovation and creating new classifications when necessary.

Read the full report here.