Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
European Central Bank president Christine Lagarde has called for financial regulators to tighten restrictions on investment funds in the “darker corners of finance” to reduce their advantage when competing with banks, as she warned against “regulatory rollback”.
Her call for a beefing up of rules on hedge funds, private equity and credit funds to achieve a “levelling up” with banks contrasts with the approach of US regulators which are instead easing rules for lenders.
Speaking at an event in Amsterdam, Lagarde said a “key shift is becoming increasingly evident — namely, signs of regulatory fatigue, which is creating an uneven playing field for financial institutions”.
Lagarde’s comments indicate she has some sympathy with EU bank executives’ complaints about competition from non-bank competitors that benefit from lighter rules, such as hedge funds, private equity, insurers, money market funds and securitisation vehicles.
“Investment funds, despite their increasing systemic importance, operate under far lighter rules compared with the banking sector,” she said. “That has in part helped to fuel their growth.”
Non-bank institutions operating in the Eurozone have grown from 250 per cent of the bloc’s economy in 2008 to more than 350 per cent today, Lagarde said.
Regulators should address the imbalance, Lagarde said, “not by lowering standards for banks, but by levelling them up for non-banks that are involved in bank-like activities, or with significant links to the banking sector”.
“That helps to address banks’ concerns about the uneven playing field,” she said, adding it would also “make potential financial stability risks that have lain dormant in darker corners of the economy more visible, allowing policymakers to pre-empt them”.
The ECB, which supervises the biggest 114 Eurozone banks, has set up a task force to examine ways of simplifying the rules on capital and reporting. But Lagarde said the “goal is not to relax rules, nor undo what has been achieved”.
Instead she said the task force would seek to reduce “undue complexity in selected aspects of the capital structure, reporting and supervision, while also maintaining the resilience of banks and fostering greater integration and harmonisation in EU frameworks”.
This contrasts with aggressive deregulation in the US under President Donald Trump, where authorities are seeking to cut funding to the accounting and consumer finance watchdogs, freezing the foreign bribery law, ditching cryptocurrency restrictions and lowering bank capital requirements.
Lagarde warned of a “fading sense of urgency” as memories dimmed of the 2008 global financial crisis. “Policymakers should not wait for another financial crisis to be reminded of how high the stakes are,” she said.
“It is imperative to extend oversight to non-banks involved in bank-like activities, or with significant links to the banking sector — and policymakers must do so sooner rather than later,” she said.