Bank of England accused of shadow banking failures

UK financial regulators have failed to tackle risks outside the traditional banking sector and should now develop comprehensive UK policy instead of waiting for an international deal, says a former Bank of England deputy governor .

Paul Tucker accused the BoE of inadequate regulation of the so-called shadow banking sector at a private event last month attended by Governor Andrew Bailey and some of his predecessors. Tucker’s slides from the BoE-hosted event have since been posted online.

Shadow banking involves a wide range of entities that engage in banking-like activity and includes bond funds, private lenders, and businesses involved in cryptocurrencies.

The Bank for International Settlements, the world’s apex body for central banks, warned in December of the need to regulate the shadow banking sector more tightly. It now accounts for nearly half of all financial assets, but countries have so far failed to agree on a comprehensive overarching framework.

Tucker told the Financial Times that the failure of the UK and other countries to properly tackle shadow banking risks could come back to haunt them.

“[It leads to] increased fragility,” he said, describing how bond funds and loosely regulated cryptocurrencies that market themselves as “safe” places to put money could quickly collapse in the event of a crisis of confidence in their value.

Advocating for the UK to move forward with full regulation of shadow banking, Tucker added: “Obviously it is not comfortable exposing the possibility of single jurisdictions moving from themselves. . . But what if another decade passes without policy and then a massive part of the shadow banking system collapses? »

In a reference to Russia’s invasion of Ukraine, Tucker said the stakes “are high given the current geopolitical discord” and the West could ill afford another crisis.

Tucker urged attendees of the BoE event to abandon the central bank’s current policy of regulating specific risks associated with shadow banking as the issues become pressing.

“Continuing to rely on targeting specific things is not going to work,” he told the FT. “That means waiting until specific activity . . . is obviously a threat to stability, but until then that part of the industry has the power to pressure, especially in Washington DC, to slow down or stop. a political initiative.

Tucker argued for the UK to have a blanket policy that would require firms behind investments claiming to be ‘safe’ to take out liquidity insurance with the BoE to allow them to pay 100% of their obligations immediately. short term.

Companies that did not have this assurance would not be able to market their products as “safe”, and the investments could not be accounted for as such in the financial statements of the companies that purchased them.

Tucker said global regulators should have started acting decisively on shadow banking about five years ago, when it was clear that huge amounts of newly printed central bank money were fueling growth in the sector. .

He also criticized the BoE’s financial policy committee, set up during his tenure at the central bank to monitor risks to the financial system, for not speaking out enough about shadow banking.

A Bank of England spokesman said “significant progress” had been made in supervising non-banks, both in the UK and internationally.

“Given the global nature of the sector, to achieve effective reform, this work and the policy action that flows from it should be coordinated across jurisdictions,” the spokesperson added.

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