Andrew Bailey: Don’t forget ‘lasting damage’ of financial crisis in push to deregulate
Andrew Bailey, Governor of the Bank of England, warned that policymakers should “not forget the lasting damage” caused by the financial crisis in a rush to drive growth.
He stressed his comments were not a “pitch for the necessity and inevitability of more regulation,” but insisted that there was no “fundamental trade off” between growth and financial stability.
“There is a reaction taking place against regulation, and the responses to the GFC. We must not forget the lasting damage done by the GFC,” he said, in a speech delivered in London.
Bailey’s comments strike a more cautious note than the de-regulatory agenda headed by Chancellor Rachel Reeves in recent months.
In her first Mansion House speech, delivered in November last year, Reeves said post-crisis regulation had gone “too far“.
She wrote to 17 watchdogs on Christmas Eve, including the City’s regulators, demanding ideas to boost the competitiveness of companies within their remit.
The Bank itself has looked at ways to ease rules on smaller banks and cut back on data reporting, but Bailey argued that the role of regulators was as important as ever given the pace of change in financial markets.
These changes have been driven by new technologies and the continued rise of new kinds of financial institutions, like multi-manager hedge funds and high-frequency trading firms
“The market looks very different to what it was only five years ago. It involves large shifts in leverage, pricing power, speed of trading and liquidity provision,” he said.
While these changes were not “inherently bad,” Bailey argued that they did create new vulnerabilities which needed to be monitored.
“Multi-manager funds can make individual ‘pods’ deleverage rapidly in stress conditions, which can exaggerate market moves,” he said.
“It is critical that we have and develop tools of assessment and intervention. But these interventions may not always need to be more regulation,” he said.
Bailey pointed to the Bank’s work in establishing new emergency lending facilities for more remote parts of the financial system in the event of market stress.
He also drew attention to the Bank’s “path-breaking” system-wide stress test, which attempts to understand how the financial sector as a whole manages and potentially amplifies shocks.
“It is important in today’s setting that we have a fully informed debate about the role of regulation,” he said.
“We must not abandon or compromise our commitment to the surveillance of risks to financial stability…And, we must retain the ability to act on these risks, and always ensure that we have the ex-ante tools to deal with potential problems,” he concluded.