Regulators worry that hedge funds could spark the next financial crisis

By Chris Matthews

In the wake of the 2008 financial crisis, regulators have kept close tabs on America’s largest banks, subjecting them to regular stress testing and imposing new rules meant to ensure their safety during periods of financial turmoil. These new rules may have made the banking system safer, experts say, but they have also fueled the growth of a shadow financial system that is providing a growing share of financing for U.S. companies and taking on new, difficult-to-measure risks in the process…Karen Petrou, co-founder of the banking advisory firm Federal Financial Analytics, Inc., said in an interview that the steady march toward greater surveillance of private funds is the inevitable outgrowth of regulations aimed at ensuring financial stability. With the major banks KBE, -0.32% facing restrictions on leverage, capital will move to less regulated areas “like water flowing down hill,” she said, though she insisted that this doesn’t mean post-2008 regulations on big banks are misguided. Nevertheless, she is skeptical that FSOC will make effective use of the data it intends to collect on private funds. “Regulators and FSOC have a very bad history of gathering data, which they do nothing until the data goes into the red zone,” she said. “At that point its usually too late.”