U.K.-based asset managers may be too optimistic about their ability to unwind positions in corporate bonds during a period of market turmoil, Bank of England Governor Mark Carney said.
The central bank has surveyed 135 asset managers and found a “wide range in terms of the apparent quality of liquidity management,” Carney told lawmakers on Parliament’s Treasury Committee in London on Tuesday.
“But in aggregate the expectation of asset managers resident in the U.K. of their ability in the corporate bond market, for example, to sell securities if there’s a stress event is a multiple, a significant multiple, of the underlying turnover in those markets,” he said.
The asset-management industry has grown rapidly, particularly in fixed income, prompting concern that a shock such as a change in interest rates may hit markets. The Financial Stability Board, which Carney heads, and the International Organization of Securities Commissions are studying the impact on financial stability of asset-management activities globally.
Carney said an “illusion of liquidity” is one of the challenges facing regulators as they try to ensure smoothly functioning markets. There’s a variety of metrics that suggest ample liquidity, “but actually when tested that liquidity is ephemeral,” he said.
The FSB and IOSCO last month put work on identifying global systemically important investment managers on hold after a barrage of opposition from the industry. Firms such as BlackRock Inc. and Pacific Investment Management Co. argue that they aren’t likely to cause systemic problems because they invest other people’s money.
“We will address issues around activities first, and then take an assessment if there’s any residual risk that merits any action because an asset-management activity is part of a bigger asset-management group,” Carney said. “Ex-ante it’s not clear that would be the case.”