A senior economist at the Bank of England has suggested banks should follow the structural model of hedge funds to reduce risk and improve banks’ time consistency.

Lessons could be learned from the hedge fund sector when "rethinking the industrial organisation of finance", according to executive director for financial stability Andrew Haldane and fellow economist Piergiorgio Alessandri In a paper published on the BoE website,

"Hedge funds started this crisis in the doghouse. Yet they are the dog that has not barked," the pair wrote. "Their industrial structure may explain why. Unlike banking, the hedge fund sector does not comprise a small number of large players, but rather a large number of relatively small players."

The paper pointed to the low concentration within the hedge fund sector with the top five funds comprising about 8% total assets. It also highlighted the average annual attrition rate for hedge funds of around 5%, compared to less than 0.1% for US banks.

"It may be coincidence that the structure of the hedge fund sector emerged in the absence of state regulation and state support,” said Haldane and Alessandri. “It may be coincidence that the majority of hedge funds operate as partnerships with unlimited liability. It may be coincidence that, despite their moniker of ‘highly-leveraged institutions', most hedge funds today operate with leverage less than a tenth that of the largest global banks. Or perhaps it might be that the structure of this sector delivered greater systemic robustness than could be achieved through prudential regulation. If so, that is an important lesson for other parts of the financial system," they concluded

The paper, "Banking on the State", was based on a presentation given at the Federal Reserve Bank of Chicago in September. It discusses issues such as the state support given to the banking sector during the financial crisis and ways of improving structure and regulation in the future.