(Adds quotes, context, background)
LONDON, Jan 21 (Reuters) - More needs to be done to identify and regulate "shadow banks" such as instant access money funds, Bank of England Deputy Governor Paul Tucker said on Thursday, warning that regulatory arbitrage remains a risk to the system.
Global policymakers are working on, and starting to implement, tighter controls for financial institutions following the recent global credit crisis.
But there have been concerns that the will to make sweeping changes could fade as developed economies around the world return to economic growth.
"This should be the crucial year in establishing a framework for a more resilient global financial system," Tucker said in a speech which examined the world of "shadow banking" -- financial activity set up outside the regulated banking system.
"We have not seen the last of regulatory arbitrage. So we need policies and principles that stand in the way of its weakening the resilience of the system, while allowing enterprise and our capital markets to flourish."
He said regulators should avoid seeing shadow banking everywhere, which could result in over-regulation.
"Where a form of shadow banking provides an alternative home for liquid savings, offering de facto deposit and monetary services, then I think we should be ready to bring them into the banking world itself," said Tucker, who is responsible for the BoE's financial stability brief.
He suggested areas ripe for more oversight included the prime brokerage units of dealers and instant-access money funds which offer to give savers at least as much as they invest on demand.
"The Bank of England believes that constant-Net Asset Value funds should not exist in their current form," he said. "They should become either regulated banks or, alternatively, variable NAV funds that do not offer instant liquidity."
He said central banks, supervisors and regulators all had a part to play in tightening up the shadow banking system.
"The authorities need to be able to recognise when a variant of 'shadow banking' has become significant to sustaining the stability in the provision of essential financial services to the broader economy." (Reporting by Matt Falloon; Editing by Patrick Graham and James Dalgleish)