BoE’s Andrew Haldane: how to rehabilitate securitisation

Author: | Published: 24 May 2013
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Interview transcript

Q: How should shadow-banking regulation develop?

These are a really important set of issues. Maybe the first point to make is that even the word shadow banking, might conjure up the wrong image. It implies something shadowy, something illicit, something that's escaped the regulatory net. There certainly were examples through the crisis of that being the case. There were somethings with the benefit of 20:20 hindsight, it might have been better if we'd regulated them as we would a bank, for example. Because when they went wrong, they caused collateral damage for the financial system, for the economy. We need also to recognize that there are large parts of non-banking, if you like, that are doing a perfectly good job. In fact, looking forward as risk is squeezed out of the formal banking system, we might require non-banks to do more of the heavy lifting in terms of financing activity in the wider economy.

This is the essence of the European Commission's green paper - that in addition to regulating banking in a more prudent way, we need to think at the same time about what alternative avenues we might wish to open up to ensure that the wider economy isn't starved of credit and that it is getting the long-term financing that it needs.

Now as it turns out, it's pretty clear where that long-term financing needs to come from. Its needs to come from capital markets, broadly defined, it needs to come from pensions funds, from insurance companies who after all have long-term liabilities with which they would therefore naturally match with long-term assets by extending long-term loans. And this is particularly important for Europe, including the UK part of Europe, because historically Europe has been very reliant on the banking system for providing its long-term financing. We've had a bank-dominated financial monoculture. Whereas in the US they have a much longer tradition of the economy being financed from non-bank sources, through capital markets of various types. For example, through securitization. So if you're financing a car loan, a student loan or even a credit card loan in the US often that would be bundled up into a security and sold to a non-bank. That second cylinder – the non-bank cylinder – its very important that starts firing within Europe. We aren't as much a banking monoculture in the future as we have been in the past. And that means not cutting off non-banking, shadow banking at its knees, but rather the opposite. In some cases, nurturing the non-bank markets so that businesses, companies, households can get their hands on the money that's needed to finance spending and investing for tomorrow. So this is a really important agenda - that we don't as regulators snuff out all that's non-banking for fear of it becoming shadow banking. There are good parts, which we should get our arms around and this will be the next regulatory frontier I think, to winnow out the good parts of shadow banking, which we nurture, and the bad parts, which we better regulate. That will keep us occupied for the next 10 to 20 years I think.

04.34 Q: What's an example of 'good' shadow banking?

Let me mention again securitization. Securitisaiton, within Europe, has got itself a bad name. It's a dirty word because many of the securitized instruments in Europe went bad during the crisis. We found loans being sliced and diced and all sorts of rubbish being tipped into them so that when the crisis came that market seized up. Because people had no sense what was good and what was bad, what had been sliced and what had been diced. And that's what's led to securitisation getting a bad name. How do we rehabilitate securitisation? Well, it's by ensuring that we set high standards for what assets are put into securitisation vehicles? Because ultimately all securitisation is, is a convenient wrapper by which bank loans of various types can be bundled up and sold to someone else – an insurance company, a pension fund, who really wants those long-duration assets. That's an example of good shadow banking cholesterol because its meeting the demands of investors for long-term assets and the demands of borrowers for long-term financing. That's the sort of shadow banking we should be nurturing and developing here in the UK and indeed across the whole of Europe.

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Part 1: Bank of England’s Andrew Haldane discusses breaking up the banks

Part 2: Bank of England’s Andrew Haldane defends leverage ratios

Part 4: Bank of England’s Andrew Haldane on the risk of 'zero interest rates’