Reuters/London
A top Bank of England official put the world’s $87tn asset-management industry on alert yesterday, saying it posed some of the same “too big to fail” risks that are being tackled by reforms at major banks.
Unlike banks, asset managers such as Blackrock, Fidelity, Allianz and Axa do not make loans, which would put them at risk if the borrowers default, said the BoE’s executive director of financial stability Andy Haldane said.
“Yet their size means that distress at an asset manager could aggravate frictions in financial markets, for example through forced asset fire sales,” Haldane said in a speech likely to upset the funds sector.
Haldane said he was not proposing action now but described asset management as “the next frontier for macro-prudential policy,” referring to the kind of specific controls on credit that central banks are imposing on banks.
“I don’t know at present whether the case is sufficiently strong for us as macro-prudential regulators to want to actively intervene,” he said. “But what I can say with 100% confidence is we need to better understand the market dynamics.”
Haldane has gained a reputation for bold thinking as head of the BoE’s financial risk division. He is due to take over as the Bank’s new chief economist in June. In the US, the Federal Reserve is showing more interest in asset-management firms, which so far have been regulated by securities supervisors.
Haldane’s speech at the London Business School’s Asset Management Conference broadens the regulatory spotlight in Britain on asset managers from specific issues such as fees paid by investors. Mutual funds – one kind of asset manager – say they pose no risks and point out that none of them failed or caused problems during the 2007-09 financial crisis. The sector is already lobbying against draft plans by the Financial Stability Board, the regulatory arm of the Group of 20 economies, to designate funds over $100bn as systemically important and subject to extra supervisory requirements.
Haldane said fund-management assets may more than quadruple, to $400tn, by 2050 as populations expand and get older and richer. In Britain, their assets have grown from less than 50% to more than 200% of gross domestic product since 1980.
Haldane said recent trends have seen “behemoths” moving into illiquid assets and index-linked, passively managed funds and away from the usual actively managed funds in blue chips and government bonds.
“These trends potentially have implications for financial- market dynamics and systemic risk – for example, greater illiquidity risk, correlated price movements and susceptibility to runs,” Haldane said.
Big funds were not “insolvency immune” he said. They could amplify swings in markets and the wider economy, giving a false picture of the price of risk. That might curtail financing through equity and long-term debt, hurting growth, Haldane said.