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October 17, 2013 6:00 pm
Regulators need to “up their game” in overseeing hedge funds and shadow banks as risky pools of capital build up beyond the heavily scrutinised world of traditional banking, one of the world’s top central bankers has warned.
Paul Tucker, the Bank of England’s outgoing deputy governor, said in an interview with the Financial Times that it would be “absolutely disastrous” if the economic fragility of banks was recreated outside the mainstream banking sector.
He drew an explicit parallel between the current situation and 2004, when super-low rates sowed the seeds for a search for yield that culminated in the crash of 2007-09.
“The west is in the course of repairing itself from the past crisis; the western world needs to be very careful that it doesn’t brew another one,” he said. “This is exactly what happened in the first part of the last decade.”
Securities regulators around the world were not yet collecting enough information about what is going on in non-banks, Mr Tucker said.
“I think securities regulators around the world just need to up their game on their oversight of non-banks; this is not just a point about this country but it is relevant to this country,” said Mr Tucker.
Mr Tucker was speaking ahead of his final day in the job on Friday as he prepares to leave the institution, where he has spent his career, for Harvard University in the US.
He said that while his institution was often portrayed as the sole guardian of UK financial stability, this underplayed the responsibility of bodies such as the Financial Conduct Authority in London, the Securities and Exchange Commission in the US, and umbrella groups such as Iosco.
“Not everything is in central banks. Actually an awful lot of future monitoring of stability is I think going to have to be done at ground level in securities regulators.”
The deputy governor, who was widely touted as a likely successor to former Bank Governor Lord King before Canadian Mark Carney clinched the post, said considerable progress had been made in regulation. If the current tools had been available before the financial crisis there would have been problems but “we could have avoided cataclysm”.
Asked about UK plans for Chinese banks to open London branches rather than more tightly monitored subsidiaries, Mr Tucker said it should not trigger regulatory issues if they were wholesale rather than retail lenders, and were conducting “vanilla” business.
The move, announced by Chancellor George Osborne earlier this week, has provoked questions from MPs over whether political pressure was applied to smooth the way for Chinese banks to enter the City of London.
The UK Treasury has insisted that the Bank’s Prudential Regulation Authority, which must assess the Chinese lenders, made its decision independently.
Andrew Bailey, the head of the PRA, on Thursday told a conference that no special arrangements were being made for the Chinese banks and that he did not regard himself as “a promoter of the City of London”.
Speaking about different countries setting different rules for banks, he said: “I hope it’s not done to create outright competitive advantage.”
Mr Bailey also said it was key for the development of the world economy for regulators to establish credible resolution regimes. That would give confidence for a move away from the insistence on subsidiarisation that many banks have been subjected to in recent years.
“We shouldn’t accept it’s inevitably a permanent feature of the world,” Mr Bailey said.
But he hinted at the prospect of lower capital requirements: “If we don’t establish trust we will continue to have Balkanisation and higher levels of equity capital. [But] the capital issue would be easier [with a proper resolution regime].”
Mr Bailey’s optimistic outlook contrasted with earlier comments from Michel Barnier, the EU commissioner, who suggested Europe should impose higher capital requirements on US banks in a tit-for-tat reprisal for US proposals that foreign banks in America should incorporate as local separately capitalised holding companies.
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