Colm Kelleher, chair of banking giant UBS, has warned of the need for regulators to spend more time policing so-called shadow banks, or non banks.
He made the stark warning during a panel discussion on the risks facing the financial system at the World Economic Forum in Davos.
He said regulators had “taken their eye off the ball” when it came to shadow banks.
The panel included some of the world’s most influential bankers: Jane Fraser, chief executive of Citigroup, François Villeroy de Galhau, governor of the Bank of France, and Tharman Shanmugaratnam, chairman of the Monetary Authority of Singapore.
Although bullish about the position of traditional banks, the panel was less positive about the regulatory position of shadow banks.
Villeroy de Galhau told the panel: “the greatest challenge today is non-banks” and that on shadow banks, the world’s regulators “lag behind”.
Using the so-called ‘dash for cash’ in 2020, the LDI blow-up and cryptocurrencies, he added: “we should rush to some urgent nonbank regulation”.
What are shadow banks?
Shadow banks are financial institutions which provide similar services to banks but without the equivalent regulation. They include currency exchanges, venture capital funds and hedge funds.
They have increasingly become an area of concern among regulators with risk migrating from the more stringently regulated traditional financial sector.
While there was agreement that nonbank regulation needed to improve, the panellists also agreed that regulation of traditional banks had made the system significantly more stable than pre-2008.
Kelleher said the banks were “systemically safe” while Villeroy de Galhau said policymakers “didn’t overegulate” after 2008, despite industry complaints. “We were right”, he added.
However, Villeroy de Galhau suggested the Edinburgh Reforms – the UK government’s wide-ranging set of reforms to the financial services – could likely increase risk. He pointed out that Andrew Bailey was concerned about it, and added: “I would tend to agree with him.”
Villeroy de Galhau was also concerned about the reforms increasing divergence between the UK and EU. Kelleher stressed that “global markets are not a zero-sum game” and that, from Brexit onwards, “political debate has trumped practicality” in the UK, excluding the UK’s financial expertise from the European market.