January 19, 2020 / 4:01 PM / a month ago

Woodford fund shows vulnerable side of shadow banking, regulator says

LONDON, Jan 19 (Reuters) - The closure of the Woodford fund in Britain showed how the $184 trillion shadow-banking sector can be vulnerable even in normal market conditions, the Financial Stability Board (FSB) said in a report on Sunday.

Shadow banking refers to investment and credit-like transactions outside conventional banks. It includes open-ended funds, money market funds, hedge funds, special investment vehicles, securitisation and insurers.

The FSB, which coordinates financial rules for the Group of 20 Economies (G20), said its narrow measure of “non-bank financial intermediation” grew by 1.7% to $51 trillion in 2018, or 13.6% of total global financial assets.

By contrast, the growth rate averaged 8.5% annually in 2012-17, when shadow banking grew rapidly as banks faced heavier regulation following the 2007-09 financial crisis.

The narrow measure covers shadow banking activities that the FSB believes could pose bank-like risks to financial stability.

The regulator’s broad measure of shadow banking dipped slightly to $183.7 trillion in 2018, the first drop since 2008 — declines un stock markets in 2018 hit asset valuations. The pullback has been generally reversed as Wall Street rallied to record highs last week.

Total global financial assets grew by 1.4% to $379 trillion in 2018, driven largely by banks, the FSB said.

The FSB singled out the flagship open-ended equity fund run by British stock picker Neil Woodford, which was suspended in June 2019 after being unable to meet redemption requests from investors. It has since been closed down, with its investors due to get some of their money back in coming weeks.

The Woodford fund highlighted potential vulnerabilities at some open-ended funds, which typically offer daily redemptions, that have significant investments in assets that are illiquid or hard to sell quickly without incurring losses, the FSB said.

Moreover, the suspension of the Woodford fund occurred in a benign financial market, the FSB noted.

The events surrounding Woodford have prompted the Bank of England to consider how a fund’s redemption terms can better reflect the difficulty of selling illiquid assets, such as commercial real estate.

Reporting by Huw Jones, editing by Larry King

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