Nonbank Leverage: The $70 Trillion Blind Spot Explained

The world's financial supervisors have identified a $70 trillion blind spot: nonbank leverage. In its April 2026 Global Financial Stability Report (GFSR), the International Monetary Fund elevated nonbank financial intermediary (NBFI) leverage—spanning hedge funds, private credit funds and leveraged ETFs—to the top of the systemic risk agenda, while the Financial Stability Board's 2026 work programme warns that a disorderly deleveraging could transmit stress through equity-bond synchronization faster than central banks can respond.

What Is the $70 Trillion Nonbank Leverage Problem?

Nonbank leverage refers to borrowed positions held outside traditional, tightly regulated banks. The shadow banking crisis of March 2020 showed how quickly these positions can unwind. According to FSB and IMF data, NBFI liabilities reached roughly $70 trillion in 2024, up from about $10 trillion in 1980, while the broader NBFI sector now holds $256.8 trillion in assets across 29 jurisdictions—double the banking sector's growth pace. Hedge funds alone reported $13.7 trillion in gross assets in the fourth quarter of 2025, with near-record leverage concentrated in a handful of large funds.

Five Amplification Channels the IMF Is Watching

The April 2026 GFSR identifies five stress-amplification channels:

1. Sovereign refinancing risk—OECD government debt has hit a record $61 trillion.
2. Synchronized asset selling—leveraged funds dump equities and bonds together, breaking stock-bond diversification.
3. Margin spirals—falling collateral values trigger forced sales.
4. Liquidity mismatch and redemption cascades—in money market funds and open-ended credit vehicles.
5. Bank credit line contagion—bank credit lines to NBFIs have doubled since 2012 to about 3% of GDP.

Hedge Fund and Leveraged ETF Leverage

Near-record hedge fund leverage is the sharpest edge of the problem. U.S. hedge funds reported a 2.41x gross-to-net ratio—the widest in 13 years—and an estimated $41.5 trillion in gross notional exposure. The near-collapse of AI-focused hedge fund Situational Awareness, which fell from about $45 billion at its July peak to around $10 billion after forced sales, illustrated how concentrated AI bets can turn into market-wide selling when lenders demand repayment.

Private Credit Defaults Meet AI-Concentrated Valuations

Private credit has grown to between $1.5 trillion and $2.5 trillion in assets, yet remains untested in a prolonged downturn. The FSB's May 2026 report warns of roughly 7x borrower leverage, effective default rates near 5%, and 40% of borrowers with negative free cash flow. Direct bank exposures range from $220 billion to $500 billion. These private credit defaults are converging with historically stretched equity valuations dominated by a small number of AI-linked companies, raising the odds that a single shock forces simultaneous deleveraging across private and public markets.

Can Regulators Close the Governance Gap?

The FSB's July 2025 final recommendations on NBFI leverage set out nine voluntary, principles-based measures, leaving implementation to national supervisors. Progress has been uneven, and critics have labelled the approach "regulatory appeasement." FSB Chair Andrew Bailey has warned that frontier AI cyber risks and private credit vulnerabilities are combining into a "fragilization scenario." Without binding, globally harmonized rules, the financial stability regulation framework remains a patchwork that markets may test before policymakers can act.

FAQ: Nonbank Leverage and the 2026 Stability Test

What is nonbank leverage? It is borrowed money used by hedge funds, private credit funds, leveraged ETFs and other nonbank intermediaries to amplify returns—and losses.

Why is $70 trillion significant? NBFI liabilities have grown from about $10 trillion in 1980 to roughly $70 trillion in 2024, with far less oversight than banks.

What happens in a disorderly deleveraging? Margin calls force synchronized selling of equities and bonds, which can overwhelm central banks' ability to stabilize markets.

Are the FSB's recommendations binding? No. The July 2025 recommendations are nonbinding and unevenly implemented across jurisdictions.

Conclusion

The convergence of record hedge fund leverage, rising private credit defaults and AI-concentrated valuations makes nonbank leverage the defining financial stability test of 2026. Whether global authorities can close the governance gap before a shock—rather than after it—remains the central question.