The Bank of England is rewarding lenders for their expanding role in financing hedge funds, private credit firms and other “shadow banking” players by cutting their capital demands. This creates a clanging dissonance when watchdogs around the world (including the British central bank itself) have been warning about the risks in this booming area of finance.
This decision also makes the BOE the global trailblazer in loosening the reins on banks ahead of debates in the US and Europe, so it could encourage rival watchdogs into a competitive lowering of standards. This may come back to haunt lenders, financial markets and economies across the West.
