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28-06-2015, 11:25 PM
Leverage caps could reduce risk, says BIS
THE AUSTRALIAN JUNE 29, 2015 12:00AM
Richard Gluyas
Business Correspondent
Melbourne
The central bankers’ club has floated the idea of caps on leverage for asset management companies and restrictions on shifts in their investment portfolios to counter new risks in the financial system from the explosive growth in the $US75 trillion ($98 trillion) industry.
The Bank for International Settlements, which has 60 member central banks that account for 95 per cent of global GDP, said in its 2015 annual report the global hunt for yield had resulted in regulated banks losing ground as financial intermediaries to mutual, private equity and hedge funds, which had mushroomed in size from $US35 trillion in 2002 to $US75 trillion in 2013.
“As a result, new types of risk have gained prominence,” said the report, released over the weekend in Switzerland.
As risk-taking migrated away from the banking sector, asset managers and their investment consultants were playing an increasingly significant role, with a lot of weight attached to the performance of various asset classes.
The BIS said asset managers’ business models, such as benchmarking to market indices and relative performance comparisons, tended to encourage shortsighted behaviour that could be destabilising in the face of adverse shocks. The danger was even more pronounced when fund managers were investing in emerging market economies, where there were fewer and more correlated benchmarks than in advanced economies.
As a result, financial shocks were more likely to affect a wide range of investors in EME funds, leading to large flows in and out of funds.
A further problem was the high level of concentration in the asset management industry, with the top 20 managers accounting for 40 per cent of total assets.
North American managers had increased market share by 11 percentage points over the past decade, and now accounted for more than half of total assets under management and about two-thirds of assets managed by the top 20 managers.
Independent managers had also been rapidly displacing bank and insurer-owned managers at the top.
This meant decisions taken by a single, large asset manager could trigger fund flows with large system-wide consequences.
In recognition of this, the BIS said the policy debate was focusing on asset management companies (AMC) as a distinctive group that created new risks.
The Financial Stability Board and the International Organisation of Securities Commissions had published a proposal on how to identify systemically important global financial institutions that were not banks or insurers.
“AMCs’ incentive structures have received particular attention, as they can generate concerted behaviour and thus amplify financial market fluctuations,” the BIS said.
“Restrictions on investment portfolio shifts could limit incentive-driven swings and, by effectively lengthening asset managers’ investment horizons, could stabilise their behaviour in the face of temporary adverse shocks.
“Similarly, caps on leverage could contain the amplification of shocks.”
The risk of a crisis triggering a flood of redemptions could also be contained by liquidity buffers, and by restrictions on rapid redemptions. This could insulate asset managers from big swings in retail investor sentiment.
The BIS said asset management firms would struggle to take over the bank intermediation function as they were less able to absorb temporary losses.
This was because retail investors, with their smaller balance sheets, shorter investment horizons and lower risk tolerance, were replacing institutions as the ultimate risk bearers.
It was therefore important to help restore banks to the role of financial intermediaries that they had successfully performed in the past.
THE AUSTRALIAN JUNE 29, 2015 12:00AM
Richard Gluyas
Business Correspondent
Melbourne
The central bankers’ club has floated the idea of caps on leverage for asset management companies and restrictions on shifts in their investment portfolios to counter new risks in the financial system from the explosive growth in the $US75 trillion ($98 trillion) industry.
The Bank for International Settlements, which has 60 member central banks that account for 95 per cent of global GDP, said in its 2015 annual report the global hunt for yield had resulted in regulated banks losing ground as financial intermediaries to mutual, private equity and hedge funds, which had mushroomed in size from $US35 trillion in 2002 to $US75 trillion in 2013.
“As a result, new types of risk have gained prominence,” said the report, released over the weekend in Switzerland.
As risk-taking migrated away from the banking sector, asset managers and their investment consultants were playing an increasingly significant role, with a lot of weight attached to the performance of various asset classes.
The BIS said asset managers’ business models, such as benchmarking to market indices and relative performance comparisons, tended to encourage shortsighted behaviour that could be destabilising in the face of adverse shocks. The danger was even more pronounced when fund managers were investing in emerging market economies, where there were fewer and more correlated benchmarks than in advanced economies.
As a result, financial shocks were more likely to affect a wide range of investors in EME funds, leading to large flows in and out of funds.
A further problem was the high level of concentration in the asset management industry, with the top 20 managers accounting for 40 per cent of total assets.
North American managers had increased market share by 11 percentage points over the past decade, and now accounted for more than half of total assets under management and about two-thirds of assets managed by the top 20 managers.
Independent managers had also been rapidly displacing bank and insurer-owned managers at the top.
This meant decisions taken by a single, large asset manager could trigger fund flows with large system-wide consequences.
In recognition of this, the BIS said the policy debate was focusing on asset management companies (AMC) as a distinctive group that created new risks.
The Financial Stability Board and the International Organisation of Securities Commissions had published a proposal on how to identify systemically important global financial institutions that were not banks or insurers.
“AMCs’ incentive structures have received particular attention, as they can generate concerted behaviour and thus amplify financial market fluctuations,” the BIS said.
“Restrictions on investment portfolio shifts could limit incentive-driven swings and, by effectively lengthening asset managers’ investment horizons, could stabilise their behaviour in the face of temporary adverse shocks.
“Similarly, caps on leverage could contain the amplification of shocks.”
The risk of a crisis triggering a flood of redemptions could also be contained by liquidity buffers, and by restrictions on rapid redemptions. This could insulate asset managers from big swings in retail investor sentiment.
The BIS said asset management firms would struggle to take over the bank intermediation function as they were less able to absorb temporary losses.
This was because retail investors, with their smaller balance sheets, shorter investment horizons and lower risk tolerance, were replacing institutions as the ultimate risk bearers.
It was therefore important to help restore banks to the role of financial intermediaries that they had successfully performed in the past.