LONDON Patchy progress on implementing reforms to make money market funds and other types of "non-banks" safer has left the global financial system vulnerable to more shocks, the G20's risk watchdog said on Monday.

The Financial Stability Board said that many of the underlying vulnerabilities that contributed to incidents, such as central banks having to inject liquidity to stabilise money market funds during a "dash for cash" at the outset of Covid-19 lockdowns, are still largely in place.

Progress by G20 countries on implementing reforms to investment funds, margining and liquidity set out by the FSB has been uneven, and "we may already be losing momentum", FSB chair Klaas Knot said in a letter to G20 central bankers and finance ministers meeting in Brazil this week.

Non-banks, which include insurers, private equity, hedge funds and other investment funds, now account for almost half of global financial assets.

"To enhance the resilience of the global financial system, it is critical that we finalise NBFI (non-bank financial intermediation) reforms and strongly commit ourselves to full and timely implementation," Knot said.

Progress is hampered by the diverse nature of the global sector, and inability to get a full picture due to patchy data.

However, the investment fund sector has been lobbying heavily against some of the reforms, arguing that many parts of the market came under stress during Covid.

There is also some debate between central banks, who want to avoid intervening in markets to fill liquidity shortfalls at investment funds, and securities watchdogs over how far to regulate non-banks.

But Knot said the FSB would press ahead with a new round of rule-making and propose by year-end how regulators could deal with leverage in non-banks such as broker-dealers, hedge funds, finance companies and securitisation vehicles.

"An ambitious policy approach is necessary to mitigate the financial stability risks associated with leverage," Knot said.

Higher interest rates mean that real estate "market vulnerabilities bear close monitoring", he added.

  - Reuters