The primary purpose of regulation is to ensure that the core banking system is safe and sound, an expert has claimed.

The primary purpose of regulation is to ensure that the core banking system is safe and sound, an expert has claimed.

Paul Tucker, deputy governor for financial stability and a member of the Monetary Policy Committee, has highlighted the role of shadow banking in the economy.

He highlighted the fact that these instruments can be problematic if they replicate the systemic risk of the banking system as a whole.

"We need to think through how to avoid the problems of the past few years replicating themselves beyond the perimeter of the regulated banking sector," he asserted.

Mr Tucker added that hedge funds and investors should not expect to have seen the last of regulatory arbitrage.

He highlighted the importance of policies being put in place that prevent it from weakening the system's resilience while allowing the flourishing of the capital market.

Last week, US president Barack Obama proposed a series of reforms that would include banning bank-operated hedge funds, as these benefit from privileges that other hedge funds do not receive.