Andrew Bailey (pictured), governor of the Bank of England
Governor of the Bank of England (BoE), Andrew Bailey, has emphasised the importance of deep due diligence to preserve financial stability in the face of new asset classes.
Speaking late last week at the Klaas Knot Farewell Symposium, Bailey highlighted the rise of alternative assets in the post Global Financial Crisis (GFC) era, in particular in non-bank finance.
On the topic of private equity and private debt, Bailey said: "Our job is to assess the consequences for financial stability purposes. It is not to presume that such developments are per se bad, but rather to ask questions and assess them with rigour, and be transparent with our conclusions."
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He noted that the failure to carry out adequate due diligence in the lead up to the GFC created a culture of "absence and at times disapproval of such scrutiny".
"The consequences were regrettable," Bailey said.
Also highlighted by the BoE governor was the growth of cryptoassets, a trend he noted was less a response to post-GFC regulation and more an outcome of technological developments.
Similar to the growth of private assets, Bailey argued that incorporating cryptocurrencies into more mainstream financial services "require[s] thorough assessment of possible vulnerabilities and their financial stability implications".
Crypto should not be regarded as homogenous, the governor continued, and should be divided into risk levels.
"Crypto of the Bitcoin variety falls into the risky investment category, whereas stablecoins used for retail and wholesale payments, rather than just to support crypto trading, fall into the money category," said Bailey.
Bailey used an article published in the Financial Times last week to make the case for more implementation of stablecoins, provided the distinction between them and more risky forms of cryptocurrency is well understood and cemented in regulation.
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In his speech, he reiterated this point: "I will go further than that and say it should enable better stablecoins to emerge than would do in a world in which the distinction was not understood and followed up."
According to Bailey, financial stability is paramount to achieving objectives such as growth and competitiveness.
"If the baby is thrown out with the bathwater, so to speak, and financial stability is relegated in terms of its importance, we will not achieve our objectives," he noted.
Bailey concluded: "We need a financial system that is ready and able to finance the next general purpose technology advance, which I would guess is AI."
