05 August 2015

VoxEU: Are asset managers systemically important?

The world’s financial authorities have been discussing whether asset managers should be designated as systematically important financial institutions, or SIFIs. This follows such designations for banks and insurance companies. For now, the authorities have concluded that such a designation is not recommended, but concerns about the systemic impact of asset managers are unlikely to go away.

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The exercise is quite problematic. The mandate to identify SIFIs is not accompanied by any instruction on what to do with institutions designated as such, even though it does not seem logical to separate out the identification and the remedy. The FSB and IOSCO do not seem to see eye to eye on this question, a division deepened by subsequent public statements by these and other public bodies.

The reason for this state of affairs is the fact that one really can only designate institutions as SIFIs if one has previously identified in what precise sense they may contribute to systemic risk and if one then can argue why the designation would mitigate systemic risk.

Based on current official documents, it is hard to see what could be the motivation for the SIFI designation beyond mere size, and even then, size as a contributor to systemic risk for an asset manager is not nearly as clear as it would be for a bank.

There may well be externalities implying that asset managers, and the funds managed by those managers, contribute to systemic risk. If no such externalities can be found, then intervention is ill advised and welfare-reducing. If such externalities can be identified, then any SIFI-related policy measures adopted must be designed to improve on the current hands-off policy by balancing benefits with costs.

The cost of acting when one should not, or not acting when one should (type I and type II errors) is very high and it is our view that strong policy tools and impacts should be much better understood before being put in use.  

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Instead of rushing ahead in designating asset managers as SIFIs, it would be better if the next steps were to increase our understanding of how asset managers contribute to systemic risk, identify the data necessary for making an assessment and develop the necessary theoretical frameworks. It is therefore fortunate that the authorities have decided not to proceed now with the SIFI designation of asset managers. 

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