There should be more international cooperation on money laundering rules to stop banking services being withdrawn from emerging economies, according to the UK’s most senior banking regulator.

Andrew Bailey, chief executive of the Prudential Regulation Authority, told a House of Lords committee that there was a “serious international coordination problem” over rules on what constitutes money laundering.

“We are seeing clear evidence of parts of the world being cut off from the mainstream banking system because of the concerns of the banks of the consequences of the actions that will be taken if they are put under question,” said Bailey, who is also a deputy governor of the Bank of England.

HSBC, fined £1.2bn in the US for allowing Mexican drug traffickers to move money around the financial system, was criticised for pulling banking from certain clients, such as Finsbury Park mosque in north London. Barclays faced intense pressure to reconsider its plan to stop providing services that would have had an impact on transmitting money to Somalia.

Bailey repeated his warning about money laundering rules as he spoke alongside fellow deputy governor Sir John Cunliffe, who highlighted the risks of pushing financial business into the $70tn (£43.8tn) “shadow banking” area and outside the scope of international regulators.

Cunliffe said the shadow banking sector was the area of financial markets where global regulators had made the least progress since the 2008 crisis.

However, shadow banking was an unfortunate term, Cunliffe said, as it was so pejorative, and to some extent policy makers wanted to “encourage another financial engine”.

It is usually taken to mean financial activities that take place outside traditional banks, such as money market funds and aspects of the fund management industry, which Cunliffe said could “mutate very quickly”. But it can also encapsulate securitisation, a way to package up bonds and an area regulators are less concerned about.

“As you regulate more and more you push risk out into the unregulated sector,” said Cunliffe.

He said international regulation “was trying to get its arms around” shadow banking.

Cunliffe said if rates rose in the United States, and “a large amount moves in the same direction on the same day”, it could cause a fire sale of assets and have a knock-on effect in the regulated banking sector.

He admitted that new rules from the European Union had reduced the amount of liquidity – the ability to sell assets quickly – in the financial system since the financial crisis.

However, it was not clear “how much of it is the result of regulatory action, and how much of it is to do with the change in business model for the institutions”.

Some of the liquidity in the markets before the crisis had proven to be illusory, Cunliffe added.