ECB Warns Hedge Funds Could Destabilise European Markets

by Phillip Morton, Investors Offshore.com

19 October 2005

Edgar Meister, chairman of the Banking Supervision Committee of the European Central Bank (ECB), has warned that the rapidly growing hedge fund industry has the power to destabilise European financial markets, and hinted that the potential risks posed by hedge fund trading activity warrant closer scrutiny.

Presenting the ECB's annual report on banking stability, Mr Meister noted that hedge funds can "seriously affect" financial stability through their largest creditors and counterparties - in other words, banks.

He went on to add that the "opacity" of hedge funds affects banks' ability to "aggregate their exposure to hedge funds," meaning that "monitoring" of the situation may be necessary where EU banks are concerned.

Mr Meister's words join a growing chorus from many regulators that hedge funds now wield too much power over the workings of financial markets. Jochen Sanio, head of German financial supervisor BaFin, has repeatedly warned that hedge funds "pose a big threat" to financial stability, while the International Organization of Securities Commissions (IOSCO), the global securities markets regulator, is drafting new rules aimed at controlling the increasingly influential $1 trillion hedge fund industry.

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