Regulating ‘shadow banks’ is hard going, says Bank of England
By Huw Jones
LONDON (Reuters) – Pushing through new rules to contain risks from the vast “shadow banking” sector is “hard going”, leaving limited room for Britain to make changes, Bank of England Deputy Governor Sam Woods said on Wednesday.
Since the global financial crisis, the non-banking sector, or shadow bank sector, made up of insurers, investment funds of various kinds and private markets has grown to account for just under half of the world’s financial assets.
While that crisis prompted a raft of bank capital and liquidity reforms, regulating non-banks has been slower, Woods told parliament’s Treasury Select Committee.
The BoE had to intervene in September 2022 when liability-driven investment (LDI) funds used by pension schemes struggled in the face of sharp hikes in interest rates.
Regulators in the EU, where LDI funds are listed, helped Britain to toughen up liquidity rules. The Bank has also set out tougher requirements for money market funds, which are also listed in the EU.
It was “hard going” to get wider “meaningful reform” in the non-bank sector due to its international nature, meaning cooperation from other countries was needed, and many stakeholders are involved, Woods said.
“It’s quite frustrating. We are making some progress,” Woods said.
In the meantime, Woods said the Bank is pushing ahead of other countries in introducing globally-agreed “step in” rules dealing with reputational and other risks from banks not helping a struggling shadow bank, or other external firm, it has connections with.
This would be no guarantee that any “shadow entity” can be dealt with, but it “gives us a good shot”, Woods said.
Lawmakers put pressure on Woods to speed up post-Brexit financial rule changes under the proposed ‘Edinburgh Reforms’, whose impact to date the committee described as a “damp squib”.
Woods said industry wanted regulators to take more time to introduce rules following consultations, and that regulators have to fit in with government timing.
“We are going at a good pace,” Woods said.
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