* Haldane says funds can pose risks because of size,
* Haldane says funds "next frontier of macroprudential
By Huw Jones
LONDON, April 4 The world's $87 trillion asset
management industry is getting riskier and echoes some of the
"too big to fail" risks already being addressed at banks, Bank
of England director of financial stability Andy Haldane said on
In a speech likely to leave the funds sector bristling,
Haldane said some recent trends in activities raise the question
whether funds can also be "too big to fail", meaning they need
curbs to avoid a failure wreaking havoc in markets and requiring
a potential bailout by taxpayers.
The sector is already lobbying intensively against draft
plans by the Financial Stability Board, the regulatory arm of
the Group of 20 economies (G20) to designate funds over $100
billion as systemically important and therefore subject to
as-yet undetermined extra supervisory requirements.
Haldane said assets in the fund management sector are
currently estimated at about $87 trillion globally and could
rise to $400 trillion by 2050 as populations expand and get
older and richer.
In Britain, the sector has grown from under 50 percent to
over 200 percent of gross domestic product since 1980.
Haldane said recent trends have seen funds moving into
illiquid assets and index-linked, passively managed funds, and
away from the traditional actively managed funds in blue chips
and government bonds.
"These trends potentially have implications for financial
markets dynamics and systemic risk - for example, greater
illiquidity risk, correlated price movements and susceptibility
to runs," Haldane told the London Business School's Asset
Risks from asset managers are different from banks because
they do not provide credit and bear that risk in their
"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.
Even if the "fail" element in "too big to fail" is a red
herring, the "big" is not, he added.
The sector has the potential to amplify pro-cyclical swings
in the financial system and wider economy, giving a false
picture of the price of risk.
Such behaviour could crimp the industry's potential to
provide long-term financing to the economy in the form of equity
and long-term debt, Haldane said. "A world without equity is
likely to be one with poorer risk-sharing and weaker long-term
investment," he added.
Haldane also noted a steady erosion of the industry's direct
holdings of British shares, with asset managers de-risking as
global equity prices fell sharply during the financial crisis, a
time when they could be playing a stabilising role.
Such behaviour is likely to worsen returns to investors and
amplify cycles in the financial system and economy, posing the
question of what policy response might be best to deal with
risks posed by asset management.
The FSB consultation on asset managers ends on Monday. The
sector's mutual funds insist they don't pose risks and point out
that none of them failed or caused problems during the 2007-09
Apart from the FSB work - which mutual funds fear will end
with their being required to hold capital like banks - Haldane
said central banks have a role too through macroprudential
policy, which so far in Britain has focused on increasing
capital held by lenders.
Haldane said where the sector's activity poses risks to the
wider financial system and economy, then macroprudential policy
may be justified even when no leverage is present and banks "are
not at the scene of the crime".
"This is the next frontier for macro-prudential policy,"
The sector can also play a role in funding the economy
through buying securitised debt, a corner of the market that is
still languishing after being tarnished in the financial crisis.
Haldane said there is support for high-quality
securitisation products that might comprise much simpler
structuring of payoffs and high and transparent underwriting
(Reporting by Huw Jones; Editing by Catherine Evans)