GW Law Faculty Publications & Other Works

Document Type

Article

Publication Date

2025

Status

Working

Abstract

This written testimony was submitted to the UK House of Lords Financial Services Regulation Committee in response to the Committee’s “Call for Evidence” regarding the growth of private credit markets since the global financial crisis of 2007-09 (https://committees.parliament.uk/work/9235/growth-of-private-markets-in-the-uk-following-reforms-introduced-after-2008). This written testimony was tendered in conjunction with the author’s oral testimony before the Committee on July 23, 2025, and addresses the following points:

1. As past deregulatory episodes have shown, the current “global deregulatory drive” to loosen financial regulation is likely to endanger global financial markets by encouraging excessive risk-taking by large banks and further expansion of “shadow banking” activities by private equity funds, hedge funds, and other nonbank financial institutions.

2. Strong equity capital requirements, incorporated in robust leverage capital standards, are essential to maintain the stability of the banking system and to sustain lending by banks through the business cycle.

3. Community banks play a vital role in the U.S. economy by providing credit to consumers, farmers, and small businesses, and by supporting the civic life of smaller and rural communities. However, community banks need greater support from Congress and regulators to maintain their viability.

4. Large universal banks, working in conjunction with nonbank financial intermediaries (“shadow banks”), have promoted a rapid and perilous expansion of private-sector and public-sector debts since 2009. Universal banks are supporting the growth of risky private credit obligations arranged by private equity firms as well as highly leveraged trading positions established by hedge funds in sovereign debt markets.

5. Private equity funds face severe challenges and are exposing bank lenders and captive insurance companies to increasing risks. Private equity funds and private credit funds are currently seeking to sell highly leveraged and illiquid investments to retail investors as well as pension funds and investment funds that serve retail investors.

6. The enormous costs of rescuing universal banks, shadow banks, and financial markets since 2007 have imposed huge fiscal burdens on governments and left central banks with bloated balance sheets. It is very doubtful whether governments and central banks could arrange another series of large bailouts in response to a future crisis without precipitating severe and destabilizing sovereign debt crises.

7. My written testimony recommends the following reforms:

(a) Prohibiting nonbank financial institutions from offering “shadow deposits,” which are short-term, deposit-like financial claims that compete with bank deposits and are highly vulnerable to investor runs.

(b) Requiring large universal banks to hold significantly higher levels of equity capital to satisfy enhanced leverage capital requirements, and to undergo more rigorous stress tests to assess the viability and resilience of their business models,

(c) Supporting the formation of new community banks and reducing compliance burdens for those banks if they provide substantial amounts of relationship loans to small and medium-sized enterprises

(d) Implementing the Financial Stability Board’s recommendations for (i) enhanced reporting and disclosure requirements for hedge funds, private equity funds, and private credit funds; (ii) mandates requiring central clearing of government securities, repurchase agreements, derivatives, and other systemically important financial instruments; (iii) strong capital requirements for clearing facilities and robust margin requirements for their customers; and (iv) increased margin requirements, position limits, and concentration limits for significant financial instruments that are not centrally cleared.

(e) Adopting stronger reporting obligations, capital requirements, asset quality and diversification standards, and oversight procedures for life insurance and reinsurance companies that are controlled by private equity firms.

(f) Prohibiting – or establishing very strong presumptions against – offerings of private equity funds and private credit funds to retail investors or to investment funds and pension funds that serve retail investors.

(g) Restructuring financial institutions and financial markets by separating banks from securities broker-dealers and other firms engaged in capital markets activities, in accordance with principles derived from the Glass-Steagall Act of 1933

GW Paper Series

2025-41

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