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The shadow banking sector, long a concern for global regulators, continues to pose a threat to financial stability, the Basel Committee on Banking Supervision is warning.

In a new report, the Basel Committee said that the non-bank financial intermediary sector, also known as the shadow banking sector, represents a concern for global financial stability based on its size, its continued expansion, and its growing connections to the traditional financial sector and the real economy.

In particular, regulators are most concerned about the banking sector’s exposure to highly leveraged firms through derivatives and securities financing.

“These types of exposures raise concerns about opaque concentration risks and potential sudden market stress, stemming from margin calls and fire sales of assets,” the report said, noting that regulators are also seeing an increased risk stemming from shadow bank involvement with crypto.

“The Committee is concerned about the growth of these exposures, given the often opaque and quickly evolving nature of the attendant risks,” it said, noting that recent episodes of distress in the shadow banking sector — such as the collapse of hedge fund Archegos Capital Management and recent stresses in government bond markets — have “highlighted vulnerabilities and deficiencies in banks’ risk management practices.”

These failings include weak governance, insufficient due diligence on clients’ exposures, and weak margining practices, along with possible efforts to seek regulatory arbitrage.

In response, regulators are putting an increased emphasis on banks’ risk management practices, and stressing “rigorous onboarding due diligence and ongoing monitoring, risk-sensitive margining and the importance of robust information disclosures from investment fund counterparties.”

The Basel Committee is also discussing how to improve oversight, close data gaps, and enhance transparency of the connections between banks and shadow banks.