ECB resurrects fund firm ‘too big to fail’ concerns

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ECB resurrects fund firm ‘too big to fail’ concerns

Research published by the European Central Bank (ECB) has revived the concern some asset managers are ‘too big to fail’, a year after other regulators dismissed the idea.

A paper published by the bank, covering risks and vulnerabilities in the investment fund sector, warned the “dominance of a limited number of asset management companies” could pose systemic risks.

Highlighting Lipper data showing that just 25 asset managers, more than half of which are owned by banks, control 53 per cent of funds under management in Europe, the central bank said there were a number of potential consequences.

“Industry-wide stress could be triggered, for instance, by a crisis of confidence in one or more large asset management companies and the funds they manage,” the paper said.

“Reputational problems in the asset management arm can adversely affect the parent company, or vice versa...ownership structures also can be a direct channel of contagion between the investment fund sector and banks, as the sponsoring banks may provide indemnification or credit lines in times of stress.”

The warning comes 12 months after the International Organisation of Securities Commissions shelved plans to identify “systemically important asset management entities”, instead opting for a separate review of industry activities.

The ECB also repeated other regulators’ concerns over funds that offer daily dealing despite investing in relatively illiquid instruments. But it said conclusions were difficult to form given the relative lack of data.