BoE shadow banking stress tests could backfire

Speaking on the sidelines during the IMF’s spring meetings, financial counsellor Tobias Adrian, said it could make regulating the sector harder, with its attempt to find pockets of instability was at risk of failing as regulators did not have enough data on their lending and borrowing activities.

He said the exercise – which will see the Bank embark on its “exploratory survey” of the shadow banking system – would produce a distorted picture of where fragility lay because of financial actors not disclosing the real nature of their activities. 

According to The Times, he said: “I worry that having an incomplete picture might give a distorted picture in terms of risk-taking. [Regulators] might feel quite confident, but they might be overlooking certain segments that turn out to be quite crucial.”  

He also believes the tests may lead funds and asset managers to change their business models to avoid scrutiny, explaining: “Once [regulators] try to understand something, there is an incentive [in the industry] to move away from that lightbulb. That is the challenge.”  

The IMF has urged governments to strengthen rules around the shadow banking sector, where participants are involved in lending but are not subject to the stringent capital rules forced on big lenders after the financial crisis.