Oversight of the asset management industry should be strengthened, with better microprudential supervision of risks and through the adoption of a macroprudential orientation, due to an increase in stability risks, according to a report from the International Monetary Fund.
The organisation’s latest global financial stability report argued that securities regulators should shift to a more hands-on supervisory model, supported by global standards on supervision and better data and risk indicators.
“The roles and adequacy of existing risk management tools, including liquidity requirements, fees, and fund share pricing rules, should be re-examined, taking into account the industry’s role in systemic risk and the diversity of its products,” it read.
The analysis focused particularly on the asset management industry, which the IMF said has seen stability risks increase recently as a result of rapid growth and structural changes in financial systems.
“Bond funds have grown significantly, funds have been investing in less liquid assets and the volume of investment products offered to the general public in advanced economies has expanded substantially.”
However, the research admitted that opinions are divided about the nature and magnitude of associated risks from less leveraged, ‘plain-vanilla’ products such as mutual funds and exchange-traded funds.
In principle, even these supposedly lower risk funds can pose financial stability risks as the delegation of day-to-day portfolio management introduces incentive problems between end investors and portfolio managers, which can encourage “destabilising behavior and amplify shocks”.
“Easy redemption options and the presence of a ‘first-mover’ advantage can create risks of a run, and the resulting price dynamics can spread to other parts of the financial system through funding markets and balance sheet and collateral channels,” the IMF warned.
The paper suggested that various factors, such as certain fund share pricing rules, create this first-mover advantage, particularly for funds with high liquidity mismatches, while herding among portfolio managers is prevalent and increasing.
Crucially, the analysis showed that larger funds and funds managed by larger asset management companies do not necessarily contribute more to systemic risk, but rather the investment focus appears to be relatively more important for their contribution to systemic risk.
peter.walker@ft.com
