Paul Tucker: Shadow banking – thoughts for a possible policy agenda Speech by Mr Paul Tucker, Deputy Governor for Financial Stability at the Bank of England, at the European Commission High Level Conference, Brussels, 27 April 2012. *  *  *  It is excellent that the EU Commission has published a consultative paper on shadow banking and is holding this conference today. The Commission’s paper fits well with the approach that the G20 Financial Stability Board is taking. The issues here are very important since, as the international community reregulates the banking industry, more activity is almost bound to be booked outside banking. We need at some point to move on to policy. I am therefore going to use today’s occasion to put on the table some thoughts for a possible concrete policy agenda. I am doing so in the spirit of wanting to help nudge this work into its next stage. And I should be clear that the FSB, where our work is led by Adair Turner, have not yet articulated our collective preferred policy approach. The definition of “shadow banking” employed by the FSB and the EU Commission is, paraphrasing, credit intermediation, involving leverage and maturity transformation, that occurs outside or partly outside the banking system.1 That is very close to the definition I used in a speech two years ago calling for work on shadow banking, except that in addition to leverage and maturity transformation I include “monetary services”.2 I want to make three broad points about this.
Ben was among the first to highlight their potential significance for monetary policy. Another example of Ben’s tendency to go against the mainstream is his critique of the use of rational expectations in macroeconomic models. When the rational expectations revolution transformed the field of macroeconomics in the late 1970s, Ben remained sceptical. He criticised the assumption that economic agents form their expectations based on a perfect understanding of how the economy works. These models did not address the question of how economic agents derive this knowledge in the first place. More recently, the literature has begun to develop models with forward-looking agents that have a limited understanding of how the economy works. This research programme is very much in the spirit of Ben’s early criticism. Page 3/4  A final example of Ben’s willingness to challenge the accepted wisdom of the day is his reservations about inflation targeting. When one central bank after another started to adopt inflation targeting in the 1990s, Ben became one of the most prominent critics of this new monetary policy strategy. His concern was that inflation targeting would lead central banks to focus single-mindedly on price stability. In doing so, Ben feared, they might lose sight of their ultimate goal of promoting economic well-being more broadly. Ben is widely recognised as one of the world’s leading macroeconomists. However, his research interests go far beyond that. Ben is a polymath, something that has become rare in modern academia. His writings cross academic boundaries between economics, philosophy, history and religion.