Former central banker Paul Tucker is the chair of the Systemic Risk Council, a Fellow at the Harvard Kennedy School, and author of Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State. 

LONG BIO

Is there an incipient crisis in securities regulations?

Better capitalized banks. More liquid banks. Less opaque banks. Less interconnected banks. Banks that can fail in an orderly way without a taxpayer bailout. Those are the rallying cries of the global programme to reform the financial system that has been underway in earnest since the G20 Leaders’ Summit in 2009. They are, indeed, good guiding principles. But is it really only about banks? No, of course not.

Princeton University Bendheim Center for Finance

Paul Tucker, Harvard Kennedy School and Harvard Business School

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Better capitalized banks. More liquid banks. Less opaque banks. Less interconnected banks. Banks that can fail in an orderly way without a taxpayer bailout. Those are the rallying cries of the global programme to reform the financial system that has been underway in earnest since the G20 Leaders’ Summit in 2009. They are, indeed, good guiding principles. But is it really only about banks? No, of course not.

There’s reform underway of derivative markets, secured money markets (usually known as repo markets), securities-lending markets, securitization markets, central counterparty clearing houses, credit rating agencies1 . These reforms are addressed to some of the economy’s main capital markets: their structure and the terms under which participants meet and trade. In most countries, they fall under the jurisdiction not of central banks and bank supervisors, but of securities regulators. That’s to say, the Securities and Exchange Commission and the Commodities and Futures Trading Commission here in the US; the Financial Conduct Authority in London; the European Securities and Markets Authority for the EU as a whole.

And then there’s an area that falls in between: ‘shadow banking’. These are firms, funds or structures that as a matter of law are not caught by banking legislation and regulation, but which have the economic substance of banks in that they borrow short term to fund loans to households and businesses. As such, they are, like banks, exposed to the risk of runs, possibly forcing them into bankruptcy and bringing about a contraction in the supply of credit to the economy, hurting more or less everyone. In other words, they can cause systemic distress. In this realm too, which by no means extends to the whole of market-based finance, it is often securities regulators that have jurisdiction. The implications of the reform agenda for the banking authorities and for securities