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Perspectives on Systemic Risk

On April 8 the International Monetary Fund issued a report, “Navigating Monetary Policy Challenges and Managing Risks”, with a chapter focused on the money management industry. The report expresses concern about potential financial stability risks posed by the asset management industry due to structural changes in financial systems, and that sector’s growth. It recommends that securities regulators focus more intensively on the systemic risks of supervised entities and on the adequacy of risk management tools.

The IMF is not the only one concerned with systemic risk. RFG has been collecting comments from various industry players. Here are some other perspectives given in response to a recent Financial Stability Oversight Council request for comment:

Money Management Institute, which represents a broad spectrum of investment advisers that manage separate accounts and sponsors of investment consulting programs, believes that “separately managed account (“SMA”) programs do not create, concentrate, or transmit systemic risk… SMA program clients are predominantly high-net-worth and other retail investors, and their assets are generally invested in liquid assets as well as invested without the use of leverage. These clients have arrangements in place for their assets to be held by banks, broker-dealers, and other highly regulated providers of custodial services that themselves take steps to limit or manage systemic risk.”

Similarly, Managed Funds Association highlighted the small size of the hedge fund industry in relation to the broader financial markets and other industry segments, and that it is also significantly less concentrated than other sectors of the financial services industry.

However, other groups are more concerned: Americans for Financial Reform (“AFR”), a coalition of over 200 national, state, and local groups including consumer, civil rights, investor, retiree, community, labor, faith based, and business groups, wrote that “[a]sset managers, especially money market funds, played a significant role in the 2008 financial crisis, although they were not its central players” and that “[r]ecent research demonstrates that hedge funds create major spillovers within the financial sector during periods of financial stress.”

Vanguard compared the FSOC’s evaluation of systemic risk in the banking industry to its evaluation of non-bank products and activities, noting that its approach has been less clear for the latter. Vanguard posits that this is due to the lack of a commonly accepted definition for the term “systemic risk,” and suggests the following: “We believe systemic risk is: a risk that begins in one institution and is then transmitted, typically in arrangements involving leverage, across the financial system to other institutions, impairing financing throughout the economy, and posing an excessive threat to financial stability.”

As you can see, the jury is still out on systemic risk among asset managers, with no clear consensus from those commenting to the FSOC.

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