Andrew Haldane, executive director for financial stability at the Bank of England, said officials may need to monitor assets to assess risks posed by mispricing.
“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.
The $87 trillion held by asset managers globally are rising in significance for assessments of systemic risk, according to Haldane, who said the industry could grow to $400 trillion by 2050. While it is different to banking, the industry’s size means regulators still have to monitor the market for disruptions.
“Distress at an asset manager may aggravate frictions in financial markets, in particular frictions in market liquidity,” Haldane said. “One example would be an asset fire-sale. This might arise if assets from a failing fund were offloaded at a pace and scale that caused indigestion in the underlying market.”
According to Haldane, this friction “might be fanned by the actions of investors or counterparties.”
“In some respects, this would mimic a banking ‘run’, albeit operating through non-conventional channels,” he said. “This could itself induce a further round of asset fire sales in an amplifying loop.”
Haldane also said regulators seeking to manage broad risks should examine the possible threats posed by investment decisions or regulatory rules that may push asset managers to “correlated fashion.” Benchmarking of fund performance may heighten swings in asset prices and create the potential for mispricing of risk premia.
“These have the potential to turn idiosyncratic market frictions into systemic market failures,” Haldane said.
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.