3 days ago
The Irish Times view on financial regulation: time to spread the net
EU regulators
are set to conduct comprehensive stress tests
of the non-bank sector, which could begin as early as next year. The non-bank sector includes hedge funds, private equity firms, and other investment vehicles that have grown significantly in size over recent years. The move has prompted fears among these investment funds that new layers of regulation are on the way. But increased scrutiny is the right course of action for two key reasons.
The creation of EU banking union in 2014 introduced a much more robust regulatory regime for systemically important banks across the 27-member union, including much stricter rules on lending and capital ratios. This has had the effect of pushing a lot of borrowing and related activities to non-bank entities, which has increased the level of risk in the sector. The stress tests aim to gauge the threat it poses to the wider economy.
There is a second and potentially more important reason. Over the first 100 days of Donald Trump's second presidency, he has slashed many of the US financial regulations introduced in the wake of the 2008 financial crisis. Of particular concern, he has hollowed out many of the federal agencies responsible for regulating the financial system and, in some cases, brought them under the direct control of the White House. Moreover, he is actively using his presidency to promote highly volatile crypto currencies.
This all creates risks in the financial markets, as does the fact that Trump's budget bill, now in Congress would, if enacted, add up to $3 trillion to the US national debt over the next decade. It is little wonder that the bond markets are nervous.
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Trump often accuses the EU of over-regulation – and the report by former European Central Bank president Mario Draghi has argued that in some areas of the economy, particularly technology, rules do need to be streamlined.
But the events of 2008 show that the bias in financial regulation needs to be towards caution. The costs of failure are just too great. The proposed stress tests of the non-bank sector are thus to be welcomed.
