Building an integrated surveillance framework for highly leveraged NBFIs – lessons from the HKMA

BIS Papers  |  No 137  | 
02 August 2023

This paper proposes a new approach to monitoring systemic risks arising from highly leveraged non-bank financial institutions (NBFIs) such as hedge funds and family offices. These types of entities usually employ a high degree of leverage, with the potential to create and amplify market stress through their concentrated portfolios and interconnectedness. At the same time, they are diverse in nature, nimble and subject to little disclosure. As such, much-needed efforts to address NBFI risks from a system-wide perspective are often impeded by data gaps. In light of the ongoing policy discussions on the NBFI sector, and recent progress in collecting more granular supervisory data, the paper highlights that multiple data sources can be integrated in new ways to extract valuable information and signals for timely NBFI monitoring. In particular, granular data from trade repositories and from regulated entities such as banks can be used to narrow data gaps. Based on the HKMA's experience, the paper explains the analytical underpinnings of building a surveillance framework to monitor highly leveraged NBFIs and suggests practical strategies that might be adopted by regulators and supervisors.

JEL classification: G01, G23, G28.

Keywords: data gap, non-bank financial institutions, systemic risk.