Asset management firms can have an impact on global financial stability because of the potential incidence of significant financial losses or failure. The author discusses the impact of asset management firms and how it compares with the impact of other financial institutions.
The author provides a synopsis of the proposed regulatory changes for asset management firms. The contrarian view is that asset management firms, unlike banking institutions, provide stability and balance during a severe financial crisis.
How Is This Article Useful to Practitioners?
Such international regulatory agencies as the Financial Stability Board and the Bank for International Settlements have eliminated the need to extend the global systemically important financial institution oversight to asset management firms. These agencies have created threshold limits for the identification of firms as systemically important. Increased regulatory oversight, however, would result in increased costs for these firms because of higher capital levels and increased reporting procedures.
The author highlights the views of the Bank of England’s Andrew Haldane, who differentiates between the structure of and risks involved in banks versus the structure of and risks involved in asset management firms. Banks are linked to the essence of the financial system because they fund their balance sheets using deposits and bonds, resulting in higher leverage ratios. The structure of an asset management firm is different in that assets are usually held separately from those of the asset management company. For instance, the largest fund manager, BlackRock, has more than $4 trillion in assets under management but only $10 billion of its own assets. Even hedge funds operate with considerably lower leverage than do banks.
Such asset managers as mutual funds, hedge funds, and even pension funds would firmly oppose any regulatory oversight that could increase pressure on the already cost-competitive industry.
Although the asset management industry has been significantly reshaped over the years with the introduction of such highly complex products as synthetic exchange-traded funds, regulatory oversight is clearly not the answer. Past recessions and financial crises have proven that asset management firms have emerged relatively unscathed, requiring no government assistance or bailouts.