Global Regulators Warn of ‘Hidden Leverage’ in Financial System

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Global financial regulators are warning against “hidden leverage” in the financial system, cautioning that a build-up of borrowed money among non-bank institutions could leave markets vulnerable to widespread stress and financial disruption.

The Financial Stability Board, a global body that coordinates on financial regulation, said in a Wednesday report that hedge funds in particular are operating with high levels of synthetic leverage, which is when derivatives are used to create exposure to certain assets.

Data gaps make it difficult to quantify how much of this leverage exists, said the report from the FSB, which is chaired by Dutch central bank president Klaas Knot.

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