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The Bank of England governor said the growing asset management industry brought “welcome diversity” to the financial system but could also increase the risk of “sudden stops” or “more intense reversals” of capital flows to emerging markets when investors rushed for the exit.
This was because more than $30tn of assets were held in funds offering investors daily access to their cash while investments in assets such as property took time to sell.
“In other words, they are built on the lie that markets always clear,” Mr Carney, who also chairs the Basel-based Financial Stability Board, said.
Global assets under management have grown from around $50tn a decade ago to $80tn in 2017, accounting for all the increase in foreign lending to emerging markets since the crisis.
The FSB, which makes recommendations to G20 regulators, has long been concerned about the asset management market because of this dramatic expansion. Last year, in a set of proposals to make the sector safer, it suggested that national authorities should have a “power of direction” over open-ended funds in exceptional circumstances, forcing them to stop redemptions.
The issue is especially relevant in the UK, where several property funds had to temporarily shut investors off from their cash when the shock of the Brexit referendum prompted a rush of redemptions.
Earlier this month, the UK’s Financial Conduct Authority set out proposals under which property funds would be forced to suspend trading in their securities if there was uncertainty around the value of 20 per cent of their assets.
The BoE’s Financial Policy Committee has suggested that these proposals may not go far enough, saying in the records of its most recent meeting that the FCA should “revisit the issue” if open-ended commercial real estate funds continued to grow in importance.
Full article on Financial Times (subscription required)