Large investment funds could be “too big” and pose a systemic risk to the global financial system, one of the Bank of England’s most senior financial regulators has warned.
In a speech that is likely to electrify the fund-management industry, Andrew Haldane, the Bank’s executive director for financial stability, said regulating funds was “the next frontier for macro-prudential policy”.
Speaking at the London Business School’s Asset Management Conference, he pointed out that assets under management were projected to rise from $87 trillion (£52 trillion) currently to $400 trillion by the middle of the century.
“These trends potentially have implications for financial markets dynamics and systemic risk – for example greater illiquidity risk, correlated price movements and susceptibility to runs,” he said. “Their size means that distress at an asset manager could aggravate frictions in financial markets, for example through forced asset fire-sales”.
The intervention comes at a time when the fund-management industry is resisting attempts by the Financial Stability Board, the G20’s global regulator, to designate funds with over $100 billion under management as systemically important.
Enormous global banks took excessive risks in the credit boom of the last decade resulting in the world financial crisis.
They had to be rescued by governments because the consequences of allowing them to collapse would have been even worse, giving rise to the description of them as “too big to fail”. But this is the first time a senior regulator has suggested that large mutual and investment funds could pose a similar danger.
Haldane accepted that the risks posed by funds were different to those of banks because funds do not generally use leverage and are therefore at less risk of sudden insolvency. But he insisted this did not mean regulators could afford to ignore their size and activities.
Last month the Bank of England announced that Mr Haldane will be moving from his financial stability brief to become Threadneedle Street’s chief economist. In that capacity he will sit on the Bank’s rate-setting Monetary Policy Committee.