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LONDON (Reuters) - A top Bank of England official put the world's $87 trillion asset-management industry on alert on Friday, saying it posed some of the same "too big to fail" risks that are being tackled by reforms at major banks.
Although asset managers such as Blackrock, Fidelity, Allianz and Axa do not make loans, which can put them at risk if borrowers default, they are still big enough to hurt the market, said the BoE's executive director of financial stability Andy Haldane.
"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 and capital requirements 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 percent confidence is we need to better understand the market dynamics."
In the United States, the Federal Reserve is showing more interest in asset-management firms, which so far have been regulated by securities supervisors.
Haldane, who is due to take over as the Bank of England's new chief economist in June, has gained a reputation for bold thinking in his current role as head of its financial risk division.
His speech at the London Business School's Asset Management Conference effectively broadened 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 are not leveraged like banks, and they point out that none among them failed or caused problems during the 2007-09 financial crisis.
Britain's Investment Management Association, an industry body, said that apart from the issues raised by Haldane, "we would add that structural changes to markets, driven by recent legislation, threaten to reduce capacity and make prices more volatile".
The Association of British Insurers, whose members are major holders of assets, had no comment on Haldane's speech.
The asset-management 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 $100 billion as systemically important and hence subject to extra supervisory requirements.
Haldane said fund-management assets may more than quadruple by 2050 to $400 trillion as populations grow and get older and richer. In Britain, their assets have grown from less than 50 percent to more than 200 percent 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 are 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.
Haldane said where the sector's activity poses risks to the wider financial system and economy, then new, macroprudential controls may be justified, even when no leverage is present and banks "are not at the scene of the crime".
Robert Jenkins, a former member of the BoE's Financial Policy Committee, which decides on macroprudential policy, questioned some of Haldane's arguments and asked if the sector needs controlling. "If so, will you move on to greed and fear after that?" Jenkins quipped.
Reporting by Huw Jones; Editing by William Schomberg and Hugh Lawson