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Global stability at risk: IMF

Global stability at risk: IMF

Asset managers should undergo a more rigorous framework of scrutiny including stress tests akin to those in place for the banking sector, the International Monetary Fund has said.

In the first of its bi-yearly Global Financial Stability Report, the IMF flagged concerns over the risks to global financial stability posed by the asset management industry.

The organisation called for greater regulation to be put on the industry.

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In the 146-page report, the IMF said that the asset management industry has under management $76trn (£51.6trn) – equal to global GPD and 40 per cent of global financial assets.

Matthew Harris, director at Dalbeath Financial Planning based in Fife, said: “The capital strength of asset management companies is a very important factor for us. They are the custodian of our clients’ assets and their ability to withstand a downturn should be tested. If necessary they should take steps to improve their balance sheets.”

Tighter regulation, rising compliance costs and continued balance sheet deleveraging following the global financial crisis has resulted in a shift by banks away from credit intermediation.

The resulting void is being filled by the non-banking sector, including asset management, according to the report.

The IMF said asset managers could help investors diversify their assets more easily and provide financing to the real economy as a “spare tyre” when banks were distressed.

Nevertheless, the growth of the AMC industry has given rise to concerns about potential risks.

Commenting on recommendations to implement stress tests, Richard Metcalfe, director of regulatory affairs at The Investment Association, said: “It is an interesting idea. It is not 100 per cent clear to us what the IMF wants to achieve, but stress testing is not something that we will rule out.

“We know that the market will overshoot on occasions, but whether that is down to investment funds and fund managers is debatable. It depends on the type of fund it is and exposure.”

He added: “We probably do not need more regulation, but we want to still have debates to see if there is anything that we can look into.”

One risk outlined in the report is the influence mutual fund investments have on asset prices – at least in the less liquid market such as bonds. Assets that are held in a concentrated manner by funds perform worst during periods of market uncertainty.

The report says: “These effects can have broader economic implications. For example, if intermediation through funds raises the probability of fire sales of bonds that are held by key players in the financial sector or that are used as collateral, then the risk of destabilising knock-on effects on other institutions rises, with potentially important macro-financial consequences.”

Secondly, the delegation of day-to-day investment decisions introduces incentive problems between the end investors and portfolio managers that can induce destabilising behaviour and amplified shocks, the IMF said.