Governments
in Europe are debating whether to follow the Trump administration’s
efforts to roll back rules put in place after the 2008/2009 global
financial crisis, with some arguing that the regulatory burden is
actually holding back investment, spending and ultimately economic
growth.
A
key source of tension is that non-bank financial firms, such as
investment funds, insurers or hedge funds, enjoy much easier rules since
they do not take household deposits and this allows them to grab market
share from traditional lenders.
LEVEL UP, DON'T EASE
"It
is vital that policymakers adapt regulation and supervision to this
challenging environment," European Central Bank President Christine
Lagarde said in a speech in Amsterdam.
"They
should do so 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," she said. "That helps to
address banks’ concerns about the uneven playing field.”
Policymakers
fear that in a crisis, the central bank will be called upon to provide
non-banks a liquidity lifeline given how deeply they are intertwined
with regular banks.
CASE FOR SIMPLIFICATION
Bank
of England Governor Andrew Bailey also warned about the danger of
rolling back financial regulation as memories of past crises fade, and
said central banks needed to keep close track of new potential threats.
"There
is ... a growing risk that because of this, as the pro-cyclical tide
turns, we are inhibited from collecting necessary data in new areas of
risk," he said in a prepared text for the event.
British
finance minister Rachel Reeves has said she wants to scale back
regulation, which she believes is holding back growth in the economy.
Bailey
said he did not think that tougher regulation of banks in Britain after
the 2008 global financial crisis was to blame for a lack of investment
and weak productivity growth in the years since.
But
he did make the case for simplification, like adoption of a simpler
capital regime for small deposit takers, in the so-called 'Strong and
Simple' regime.
Isabel
Schnabel, an ECB board member in charge of market operations, also
spoke out against easier regulation, warning that a 'race to the bottom'
would fuel instability that could sow the seeds of a future crisis.
"Rather
than softening bank regulation, we should make sure that those areas of
the financial system that pose new risks to the economy and banks, such
as non-banks or stablecoins, are regulated appropriately without
stifling innovation," Schnabel told the same event.
Calling
stablecoins the most important digital development in recent years,
Schnabel warned that they have created new interconnections between
banks, crypto markets and traditional asset markets, which could create
liquidity stress.
Stablecoins
combine money-like demandable liabilities with reserve assets that
could turn illiquid during crises, Schnabel warned.
She
also noted that if depositors shift into stablecoins backed by bank
deposits, stable retail deposits are replaced by more concentrated and
potentially more volatile wholesale deposits, increasing the risk of
sudden outflows.
Additional reporting by David Milliken and Yoruk Bahceli; Editing by Toby Chopra and Susan Fenton
Our Standards: The Thomson Reuters Trust Principles.
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