The International Monetary Fund (IMF) has called on policymakers and regulators to adopt a macro-prudential approach that will assess the impact of the asset management industry as a whole on the stability of national financial systems.
The Bretton Woods institution said the debate on investment funds has intensified, especially since the global economy is still smarting from a recession that paralyzed many economies around the world. A recent survey by the IMF for the Global Financial Stability Report noted that risks from some segments of the industryÔÇöleveraged hedge funds and money market fundsÔÇöare already widely recognised.
“Securities regulators should shift to a more hands-on supervisory approach with better data, risk indicators, and analysis, including stress testing. Establishing global standards on how to monitor and supervise the industry is essential,” the institution stated.
The IMF said the industry manages over $75 trillion assets globally, exceeding 100 percent of world GDP. In particular, said IMF, bond funds have grown significantly, investing in less-liquid assets such as emerging market bonds and high-yield corporate bonds. The Botswana industry has also been dogged by its own controversies that have kept the regulator burning the mid night oil.
“Policymakers and regulators should adopt a macro-prudential approach to assess the impact of the industry as a whole on the stability of the financial system. In this context, supervisors and regulators need to re-assess the role and adequacy of existing risk management tools,” the IMF added.
Chief of the Global Financial Stability Analysis Division at the IMF, Gaston Gelos advised that regulators should find ways of reducing the incentive for investors to withdraw their money when they see others exiting.
“This could be done, for example, by well-designed redemption fees that do not hurt investors overall, for example if the revenue accrues to the fund’s net asset value. Moreover, the pricing of fund shares should be set in such a way that exiting investors do not pass on the cost of liquidity to remaining ones.”
However, the IMF noted that the larger role of the asset management industry in intermediation has many benefits. It helps investors diversify their assets more easily and can provide financing to the real economy as a “spare tire” even when banks are distressed.
It also pointed out that the industry has advantages over banks from a financial stability point of view. “Banks are predominantly financed with short-term debt, exposing them to both solvency and liquidity risks,” it said.
IMF added that in contrast, most investment funds issue shares, and end investors bear all investment risk.
“Intermediation through funds also brings funding cost benefits and fewer restrictions for firms compared with bank financingÔÇöit does, however, also expose firms to more volatile funding conditions, so the advantages have to be weighed against the risks.”
“Nevertheless, the growth of the industry has given rise to concerns about potential risks. By now, the assets under management of top asset management companies (AMCs) are as large as those of the largest banks, and they show similar levels of concentration.”