Financial industry leaders are taking on hedge funds, even if regulators aren't.
Unregulated financial companies such as hedge funds may pose a systemic risk to the economy if oversight isn't increased, Deutsche Bank AG's chief executive, Josef Ackermann, said in a Jan. 27 interview at the World Economic Forum's annual meeting of movers and shakers.
"You have an unregulated area which becomes — as a consequence of all the regulatory changes — more and more important," Ackermann said in Davos, Switzerland.
"You may one day wake up and realize that the systemic challenges are so big that you will have to bail out or at least help support the unregulated sector."
Ackermann's warning echoes comments made in Davos by former U.S. Treasury Secretary Lawrence Summers, who said that regulators have not paid enough attention to problems that could emerge in "a large, less-healthy buccaneer sector."
Hedge funds have dodged the brunt of new global banking regulation aimed at avoiding a repeat of the worst global financial crisis since the Great Depression.
"If you separate utility banks from casino banking, you will one day realize that casino banks are also counterparties to corporations, but also to other banks and to asset management and to governments," Ackermann said.
"It would be somewhat naive to assume that if you have a strong regulated sector and leave the unregulated in the open, that you will never have systemic risk."
The biggest U.S. banks, such as Bank of America Corp. and Goldman Sachs Group Inc., are facing tighter scrutiny and higher capital requirements.
They argue that they'll be at a competitive disadvantage if hedge funds, money managers and insurers are not subject to similar constraints.
Representatives for such firms have fought back in meetings with government officials, saying economic stability wouldn't be threatened if one of their firms failed.
The Alternative Investment Management Association, a London group that represents hedge funds, said Jan. 28 that it's "inaccurate" to call the industry unregulated.
"All the major jurisdictions where hedge funds operate, whether in North America, Europe or Asia Pacific, have rigorous regulation of the industry," Andrew Baker, the group's CEO, said in a press release.
"This already rigorous regulation is being increased by new legislation introduced since the crisis."
Congress in July approved the Dodd-Frank Act, which forces hedge funds to undergo routine inspections by the Securities and Exchange Commission and requires firms that manage more than $1 billion to disclose their investments, leverage and risk profile to their regulators.
European lawmakers in November approved regulations requiring hedge funds to set limits on their use of leverage and avoid pay practices that encourage risk-taking.
In the interview, Ackermann said that Deutsche Bank, which is scheduled to publish its fourth-quarter and full-year financial results Thursday, will likely pay bonuses that are in line with its competitors.
Ackermann was asked about considerations by Credit Suisse Group AG to pay parts of bonuses with bonds that convert into equity if the company's capital shrinks.
Deutsche Bank sees "too many challenges" with contingent convertible bonds and is not yet planning to use them for pay, he said.
