(Repeats, without changes, story first published on Sunday)
By Huw Jones
LONDON, June 29 While banks are dumping risky
assets as regulation bites, asset managers are plugging the
funding gap and using their growing clout in ways that could
harm markets, the Bank for International Settlements says.
Nearly six years after the financial crisis forced taxpayers
to bail out lenders, the global forum for central banks said in
its annual report on Sunday that the financial system is at a
Banks are reconfiguring their business by ditching risky
assets to limit how much extra capital they must hold under
tougher new rules aimed at avoiding bailouts in future crises.
"In the advanced economies most affected by the crisis, bank
credit to corporates has ceded ground to market-based
financing," the BIS report said.
The asset management sector's growth to more than $60
trillion under management has coincided with an increase in the
market share of the biggest players, with the top 20 managers
representing over a quarter of the sector.
The global Financial Stability Board (FSB), based in the
same building as the BIS in Basel, Switzerland, is facing
opposition from big asset managers to its plans to impose
tougher supervision on them.
The BIS acknowledges benefits in market-based finance.
The European Union is encouraging funds to put money into
infrastructure as about 70 percent of funding for the economy in
the 28-country bloc comes from banks.
But the BIS cautioned that asset managers can hurt market
dynamics and funding costs.
"Portfolio managers are evaluated on the basis of short-term
performance, and revenues are linked to fluctuations in customer
fund flows," the report said.
"Single firms in charge of large asset portfolios may at
times exert disproportionate influence on market dynamics.
Another concern arising from concentration is that operational
or legal problems at a large asset management company may have
disproportionate systemic effects," the report said.
The BIS said there are still doubts over the core capital
ratios - the main measure of a bank's health - being published
by lenders. There are variations in how banks calculate ratios
by assigning risk weightings to their assets.
"The combined effect of these varying practices suggest that
there is scope for inconsistency in risk assessments and hence
in regulatory ratios," the report said.
A key driver of the variations is in the way banks set aside
capital, if at all, to cover possible default on the sovereign
debt they hold.
But the report stops short of backing some policymakers who
want an end to the "zero" risk weighting assigned to more than
half of the sovereign debt held by banks. The need to bail out
several EU countries showed that sovereign debt can lose its
The BIS also stops short of backing the calls from hawkish
regulators in Britain and the United States who want radical
changes to the models big banks use to assign risk weightings.
The report said models used by banks permit a "natural and
welcome diversity of risk assessments among banks".
More objective measurement of underlying risks was needed,
along with better supervisory safeguards on the use of models,
the BIS report said.
Introducing a single regulatory model, such as a unique set
of risk weights that all banks must use, could encourage risk
concentration, the report added.
(Reporting by Huw Jones; Editing by Ruth Pitchford)