Volcker told the International INstitute of Finance meeting in Beijing June 11:
Hedge funds and private-equity funds have an entirely legitimate role to play in providing liquidity and innovation in our capital markets. I do not believe they need to be so closely supervised and regulated as depository institutions. A presumption of government protection and support for financial institutions outside the "safety net" should be avoided.
Nor by the same token should hedge funds or private-equity funds indirectly benefit from official support by sponsorship or ownership by a banking institution. The possibility that failure of a large hedge fund or trading organization might present a systemic risk can be reduced by way of speeding timely resolution of troubled nonbanking institutions. Such authority already exists in the United States for insured banking institutions by means of appointing a "conservator" or "receiver" empowered to maintain continuity of services pending a more lasting resolution of a failing institution.
There is a growing international consensus that hedge funds and equity funds beyond some de minimus size should at least be required to register, with the implication of limited reporting requirements. There may be a few instances in which such funds become so large as to suggest official capital and leverage requirements would be appropriate. Hedge and private-equity funds are necessarily dependent on banks for credit and operational needs. Encouraged by supervisory and risk-management processes, such funds could be appropriately monitored and controlled through those banking relationships.
Indeed, I would go farther. The increasing perversity of bank regulation, including the implicit guarantee of large banking institutions I discussed yesterday, increases the need for institutions outside that system to keep financial markets honest.
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