In today’s review the FSA says that regulators and central banks need to gather greater macro-prudential information on hedge fund activities and calling for regulation of shadow banking on the basis of economic substance and not legal reform.
In his speech, Turner says: “If there are activities, such as hedge funds, which are not at present bank-like or clearly systematically important, but could evolve in that direction in the future, we need the powers to gather the information required for regulators and central banks to assess the systemic impact of these institutions, and powers to extend prudential regulation to them if needed.”
AIMA chief executive Andrew Baker says: “We are glad that the Review points out that hedge fund leverage “is typically well below that of banks – about two to three on average” compared with levels of up to 50 times with some of the banks; and that “hedge funds in general are not today bank-like in their activities”.
Given those qualifications, we do appreciate why in the interests of financial stability the Review says that regulators need the power to apply appropriate prudential regulation to hedge funds if they judge that their activities have become bank-like in importance.
We note that any such regulation is hypothetical at present (the Review talks of “if it ever did become appropriate” to do this) and we are glad that Lord Turner has stressed that any regulation in this respect should focus on economic substance not legal form.”