Bank of England Governor Calls for More Authority to Regulate Derivatives, Hedge Funds and Other Non-Bank Financial Firms

Bank of England Governor and Chair of the Financial Policy Committee (“FPC”) Mark Carney called for greater regulatory authority in a letter responding to Chancellor of the Exchequer George Osborne’s points on the Committee’s primary and secondary objectives pursuant to the Bank of England Act of 1998.

Chair Carney’s recommendations were a response to Chancellor of the Exchequer George Osborne’s recent restatement of the objectives for the FPC under the Bank of England Act of 1998. Chair Carney stated that the FPC “seeks to ensure the financial system has the resilience to withstand stress while continuing to provide critical services to the real economy.” This includes “the provision of credit to business in support of productive investment” and is consistent with the FPC’s primary objective of reducing systemic risk and enhancing the resilience of the UK financial system. Although the FCP’s “view is that the core of the system is now significantly more resilient,” Chair Carney asserted that the FCP will continue to “assess the cumulative effects of reforms to make the financial system more resilient and consider whether in aggregate they have unintended undesirable effects.”

Chair¬†Carney listed three methods that the FCP will use to maintain financial stability in line with the stated secondary objective of “boosting the UK’s productivity” and “improving competition, innovation and competitiveness in the UK financial services sector.” The three methods include: (i) taking into account the potential short-term negative effects of its actions to increase resilience; (ii) continuing to carefully design its policies in pursuit of its primary objective to contribute as far as possible to reaching the secondary objective; and (iii) assessing its work program “to consider the extent to which policies in pursuit of its primary objective can also support its secondary objective directly.”

Chair Carney stated that the FCP will “review a number of activities in the non-bank financial system over the next year, to consider potential systemic risks posed by: the investment activities of open-ended investment funds and hedge funds; securities financing transactions; the non-traditional, non-insurance and investment activities of insurance companies; and derivative transactions.”

Lofchie Comment: Query: Is the desire of banking regulators to regulate non-banks good for the global economy? To what extent are the prudential requirements that apply to banks, which can take insured deposits, relevant to private funds, that ought to be able to invest and fail?