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FRM Part II · FRM Exam Part II · Global Financial Stability Report, April 2025, Chapter 2 (Geopolitical Risk)

Why do authorities emphasise monitoring nonbank financial institutions when assessing financial stability risks arising from geopolitical shocks?

Authorities monitor nonbanks because leverage, liquidity mismatches and fast portfolio rebalancing can amplify geopolitical shocks, with forced selling and margin calls creating spillovers to markets and banks. They are not covered by bank capital rules and do not always stabilise prices.

  1. ANonbanks hold no market exposures
  2. BNonbanks can amplify shocks through leverage, liquidity mismatches and rapid portfolio rebalancing, creating spillovers to markets and banksCorrect
  3. CNonbanks are fully covered by bank capital rules
  4. DNonbanks reduce market volatility in all circumstances

Explanation

Funds and other nonbanks can face redemptions and margin calls, and their forced selling can amplify price moves and spill over to banks. They are not all subject to bank capital rules, and they do not always dampen volatility.

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