The new system of global financial regulation could channel dangerous risk into the “shadow” banking system, a group of executives from the world’s largest financial firms has warned.
The bosses, who include chairmen of HSBC and UBS, say that they support the new “macroprudential” tool-kit assembled by regulators in the wake of the global 2008-09 financial crisis. But they also warn that the policies must be rolled out across the financial system, and not just imposed on commercial banks.
“Applying macroprudential policies only to regulated entities may limit credit formation and push credit intermediation outside to the shadow banking sector and thus be a source of systemic risk,” they say.
Their statement, co-ordinated by the World Economic Forum group which organises the annual conference in Davos, also warns regulators to be careful in using the tools. “It is essential … that all stakeholders are aware of the limits of our current knowledge regarding the impact of the application of macroprudential policies, the known and unknown risks that they may generate, as well as the trade-offs that society will be faced with,” it says.
“It is as yet unclear how effective prudential and monetary tools are at limiting systemic risk and how they may impact the real economy, especially in advanced economies with increasingly complex financial systems.” The statement also stresses that regulators must co-ordinate carefully with monetary and fiscal policymakers when exercising their new powers.
Among the 15 signatories to the WEF statement is Douglas Flint, the chair of HSBC, Europe’s biggest bank which is currently reviewing whether to move its headquarters out of the UK.
Others include Axel Weber, the chair of Switzerland’s UBS and Larry Fink of the world’s largest asset manager, BlackRock.
Also among the signatories are Anshu Jain of Deutsche Bank and Michel Liès of the insurer Swiss Re.
The macroprudential tools that central banks and other regulatory authorities have adopted in recent years include the power to impose countercyclical capital buffers on banks and to limit the loan-to-income ratios on borrowers. The theory is that the new tools will allow regulators to curb the build-up of risk in the financial system without crushing growth through a hike in interest rates across the economy.
The Bank of England’s Financial Policy Committee imposed specific measures to dampen Britain’s mortgage market last year, limiting the number of high loan-to-income mortgages that banks can underwrite each quarter.
The WEF statement also warns of the “societal consequences” of regulators using the new tools to indirectly restrict the public’s access to credit. “Managing credit supply to real estate is likely to have implications for home ownership and will have different impacts on various segments of society,” it says.
“The group hopes that this statement will contribute to the ongoing dialogue between policymakers, industry participants, academics and society at large on the right balance between financial stability and economic growth,” said Matthew Blake, head of banking and capital markets at the WEF.Reuse content