Asset Managers “Blind” to Risks of Systemic Regulation?

When the Office of Financial Research (OFR) released a report concluding that asset managers could contribute to “systemic risk,” RFG cautioned this could possibly be one of the most important reports impacting the asset management industry as a result of Dodd Frank. (See here.) On January 8th, a largely European international standard setting organization, the Financial Stability Board, described those asset managers it believes might be systemically significant. See the report here.

And yet the asset management industry remains strangely quiet about these developments.

Recently, Peter Wallison, Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute (AEI) and former general counsel of the U.S. Treasury Department, noted his concern that the industry could be swept into the systemic risk vortex before it perceives an issue. In a recent AEI paper, Wallison writes, “the larger asset managers in the industry are in jeopardy of being designated SIFIs and subjected to the stringent regulation Dodd-Frank requires the Fed to impose.” To avoid this outcome, asset managers “must demonstrate to the FSOC that their management activity is not a source of systemic risk.” He continues, “Few of them seem to have understood that this is the challenge they face.”

Wallison does note that the SEC posted the OFR’s report on its website and that the posting has generated some responses. However, his concern is that the industry misperceives the risks. The risks are not that the asset managers themselves are systemically important, but that the activities of the advised funds may be. According to Wallison, “What most asset managers have failed to do thus far, then, is to show that the outcome of these behaviors [cited as possibly causing systemic risk]—even if they occur—does not and indeed cannot result in a systemic event.”

His paper (available here) describes why he believes it is possible to make that case.