The European Central Bank (ECB) warned on Monday that increased financial regulation could lead to other kinds of risk-taking that officials will have to keep in their sights.
Responses by banks and other financial institutions to measures aimed at preventing future crises will have to be followed carefully, “and attention must be directed to detect new risks that may emerge from the reaction to the new regulations,” ECB Vice President Vitor Constancio told a conference in Frankfurt, Germany.
“For instance, the increase in the cost of capital may lead to strategies by financial institutions, to more risky activities and projects or to the creation of new types of non-regulated entities to conduct financial business,” he said.
“The perimeter of regulated institutions risks becoming a sort of moving target,” Constancio said.
Authorities worldwide have been pressed to tighten oversight of banks, insurers, hedge funds, brokers and private equity funds, among others, to ensure that taxpayers are not forced to back more massive bailouts like those seen since in 2007 and 2008.
Banks counter that increased regulations will force them to curb lending to the wider economy, a crucial element in ensuring an uncertain recovery does not falter.
Constancio reminded the academics and central bank officials gathered in Germany’s financial capital that some major changes lay ahead.
“The general overhaul of regulation that has been recently decided or is being prepared has far-reaching implications from the point of view of macro-prudential policy,” he said.
“The increase of capital and liquidity requirements, the limits to leverage, the new framework to deal with derivatives, the measures to address the problem of institutions ‘too big to fail’ either through higher loss absorption capacity or better resolution schemes — are all measures that contain important elements responding to macro-prudential concerns,” he said.
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