This is the fourth in our series of GT Alerts reporting on the House of Lords Financial Services Regulatory Committee (the Committee) inquiry into the non-bank financial institutions (NBFI) sector.
Our first three GT Alerts have focussed, in some detail, on whether banks and NBFIs should be treated differently from a prudential regulation perspective. The evidence provided to the Committee by a number of witnesses has identified that banks, as a result of being authorised to take deposits from the public and by providing access to the money transmission systems, are in a different position from NBFIs and, to that extent, arguably have less systemic significance. Investors in NBFIs, debt funds in particular, have access to information and the ability to undertake due diligence on the debt fund advisors and negotiate the investment parameters.
In this GT Alert, we consider in more detail whether, even though different from banks, NBFIs nonetheless pose systemic risks. This is a matter that the Committee has focussed on from the outset. However, before considering the evidence presented to the Committee, we will examine what happened to the once-famed hedge fund, Long Term Capital Management or LTCM, which we referred to in our previous GT Alert.