Bank of England’s Bailey warns of backlash against regulation

LONDON: The cost of the 2008 global financial crisis (GFC) should not be forgotten during a backlash against the burden of financial regulation, Bank of England Governor Andrew Bailey said on Tuesday, warning the bank needed to monitor new vulnerabilities.

“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. There is no trade off between economic growth and financial stability,” Bailey said in a speech at the London campus of the Chicago Booth School of Business. Over the past month finance minister Rachel Reeves has stepped up pressure on regulators and other public bodies to boost economic growth.

In the United States, President Donald Trump’s administration has effectively neutered some regulators, with the Consumer Financial Protection Bureau ordered to halt much of its work.

Bailey said more regulation was not the only option to tackle financial risks and highlighted the BoE’s development of a new liquidity facility for non-bank financial firms and its recommendation for improved clearing of gilt repo transactions.

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He said the structure of the financial system had shifted significantly in the last five years, with new vulnerabilities emerging in the non-bank financial system - which includes hedge funds and high-frequency trading companies.

“As fund leverage increases and risk asset prices rise inexorably over time, there comes a point at which an inevitable strain is placed upon the system,” Bailey said.

While these shifts in pricing power, leverage and liquidity were not inherently bad, they meant the BoE would need to monitor emerging vulnerabilities in the system, and possibly come up with new tools to handle them.

“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,” Bailey said.

Reeves says British regulators will remain operationally independent under the Labour government but in November accused them of “regulating for risk, but not regulating for growth”.