Regulation  

Carney calls for his powers to be extended

Carney calls for his powers to be extended

Criminal sanctions should be updated, with market abuse rules similarly extended and maximum prison terms lengthened, according to Bank of England governor Mark Carney.

While calling for more power for his regulator, he said the Bank was also looking at the cumulative impact of reform of the fixed income, currencies and commodities rules on the functioning of markets.

Mr Carney acknowledged that while the core of the system has been made more resilient, the combination of new prudential requirements on dealers and structural changes in markets has reduced market depth and increased potential volatility.

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Speaking at the Lord Mayor’s banquet for bankers and merchants of the City of London at Mansion House yesterday evening (10 June), he said that firms and regulators should be alert to these developments, including their consequences for investment funds that offer daily liquidity while investing in securities that only appear liquid.

To be clear, Mr Carney explained that more expensive liquidity is a price well worth paying for making the core of the system more robust, adding that removing public subsidies is absolutely necessary for real markets to exist.

“Volatility characterises such real markets and much of the pre-crisis market making capacity among dealers was ephemeral.

“However, the possibility of sharp, unpredictable changes in market liquidity poses a clear risk to financial stability, particularly when some market participants take liquidity for granted and crowd into trades in anticipation of central bank action.”

He added that the Bank is keenly alert to such risks. “The FPC and the FSB are currently analysing these issues and welcome perspectives on whether the market, regulation or both should adjust for the good of the system.”

emma.hughes@ft.com