“Modulating the price of risk, when this is materially mispriced, could be every bit as important as controlling its quantity,” he said in a speech in London today. “This is the next frontier for macroprudential policy -- whether, and if so how best, to moderate excessive swings in risk premia across financial markets which risk damaging the financial system or wider economy.”
Haldane sits on the bank’s Financial Policy Committee, charged with monitoring broad risks to the financial system and using tools such as bank-capital requirements to contain those risks. He’s also the chief economist-designate after Governor Mark Carney announced management changes at the central bank to unify its multiple policy responsibilities.
Asset managers are rising in significance for assessments of systemic risk as more workers use defined-contribution pension arrangements and new government rules allow them more control over their retirement savings, Haldane said. Officials seeking to manage broad risks should examine the possible threats posed by investment decisions, alongside existing efforts to tame risks posed by banks.
“Distress at an asset manager may aggravate frictions in financial markets, in particular frictions in market liquidity,” he said at the event at the London Business School. “Future illiquidity pressures in financial markets, generated by asset management distress or wholesale portfolio reallocation, may be larger and more potent.”
Some common practices at insurance companies and pension funds have the potential to lead to systemic market failures, he said. Benchmarking of fund performance may heighten swings in asset prices and create the potential for mispricing of risk premia. Accounting and regulatory rules may also play a role.
The Financial Stability Board, led by Carney, is considering risks posed by “non-bank, non-insurer globally systemically important financial institutions.” Asset managers are being considered in this group of NBNI G-SIFIs, which Haldane described as a “new high-water mark for impenetrable financial acronyms,” and the FSB will report to the Group of 20 nations later this year.
To contact the editors responsible for this story: Craig Stirling at email@example.com Fergal O’Brien, Andrew Atkinson