LONDON/MILAN (Reuters) -Regulators should consider direct limits on leverage used by non-bank financial firms in core markets as well as measures to curb their size, the Financial Stability Board said on Wednesday in a series of recommendations to make 'shadow banking' safer.

Non-bank financial institutions, including hedge funds, private credit providers and insurers accounted for $218 trillion, or just under half, of the world's financial assets in 2022, according to the G20's FSB, a group comprising financial regulators and authorities around the world.

The so-called 'shadow banking' sector's rapid expansion is a growing priority for the FSB and for individual regulators, who worry about its lack of transparency and the degree to which its problems could threaten the resilience of broader financial markets.

The FSB has previously found that leveraged non-bank financial institutions played a significant role in the March 2020 market slump at the start of the COVID-19 pandemic when hedge funds scrambled to unwind positions in the U.S. Treasury cash-futures basis trade, amplifying market instability.

Other episodes cited by the FSB include the collapse of hedge fund Archegos in 2021, and the market turmoil caused by a hedging tool used by British pension funds that almost imploded large parts of the industry in 2022.

The report published on Wednesday, the culmination of several years' work, makes key recommendations for financial regulators to improve monitoring of the non-bank sector and to intervene to make their financial systems safer.

"Authorities should take steps to address the financial stability risks created by NBFI leverage that they identify in their core financial markets," the FSB said in its report.

"Where appropriate measures are not yet in place, activity-based and entity-based measures, as well as concentration-related measures, should be selected, designed and calibrated to be effective and proportionate to the identified financial stability risks."

Among its recommendations, the FSB said supervisors should introduce, when needed, direct limits on leverage, enhanced margin requirements in derivatives markets, curbs to limit the over-concentration of firms and the requirement for participants to report large positions.

Other proposals include improving regulatory co-ordination and stopping "incongruent regulatory treatments", which can lead to regulatory arbitrage and increased financial stability risks.

The FSB said it would now undertake further work to help authorities apply its recommendations, with members considering later this year whether more work is needed on specific proposals.