Investment funds that have expanded into the lending business need to be regulated more tightly before they can cause another financial crisis, European Central Bank President Christine Lagarde said on Friday.
“It is imperative to extend oversight to non-banks involved in bank-like activities, or with significant links to the banking sector — and policymakers must do so sooner rather than later,” Lagarde said in a speech in Amsterdam to mark the retirement of Klaas Knot, former chair of the Financial Stability Board.
Lagarde said that the passage of time since the last great financial crisis had dulled the alertness of policymakers to risks building up in the system. These risks are now carried by a variety of hedge funds and credit funds, rather than by the traditional banking sector, mainly due to the fact that it was banks, rather than investment funds, that bore the brunt of the wave of regulation that followed the 2008 crisis.
Lagarde said this had created an uneven playing field between banks and non-banks, and acknowledged the “regulatory fatigue” that has motivated banks to press for a lighter regime.
However, she said that the answer was not to reduce regulation on the former, but rather to level it up, by applying tighter standards to non-banks.
“Preventing instability is always less costly than repairing the damage afterwards,” Lagarde warned, noting that the burden of repairing the damage tends to fall on the central bank.
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