Bank of England to simulate fund management crisis in new risk probe

BoE

The Bank of England is to present “a risk simulation exercise” through a study that examines the resilience of liquidity in European corporate bonds where funds come under stress.

It is understood the Financial Policy Committee at the Bank has been looking at the funds industry and what impacts events such as fund withdrawals, fire sales of assets and other issues related to the fund structures could cause systemically.

The BoE confirmed it is publishing a paper next Wednesday that will detail the operation with the title Simulating stress across the financial system: resilience of corporate bond markets and the role of investment funds”.

The BoE declined to comment further.

Fund Strategy understands the simulation exercise will not be an equivalent of a stress test the Bank regularly conducts on individual banks on a firm-by-firm basis.

In January, The Financial Stability Board published a consultation setting a number of recommendations to G20 countries on how and whether asset management could pose a financial systemic risk, as it increases its scrutiny from banks to money managers.

The FSB said the asset management market has grown from $53.6tn in 2005 to $76.7tn in 2015. It outlined funds have been increasingly involved in activities usually done by banks, such as bond trading.

The paper remarked on the risks from leverage, fund liquidity mismatch, and operational risks that could cascade back from funds to the domestic and international financial system.

“Enormous systemic implications”

The FSB and Bank renewed focus on asset managers follows last year’s the commercial property fund saga post-Brexit vote, which saw a number of funds suspending trading and impeding people to withdraw their cash.

This has prompted the FCA to launch a review of the structure of open-ended funds.

In 2015, US-based Fidelity Investments said: “The FSB attempts to support its proposal by imagining a series of hypothetical circumstances in which an investment fund or asset manager could somehow create heavy losses for counterparties or experience disorderly asset liquidation.

“By continuing to pursue a designation approach the FSB is wasting scant regulatory resources that could be utilised to identify and address genuine systemic risks.”

FiNexus co-managing director Chris Sier says the FCA final report on the asset management industry has already created “a big reputational blow” to the sector.

He says: “The FCA report has been fundamental at reminding what asset management actually does. It’s the largest market in Europe with £7trn assets.

“The asset management industry has enormous systemic implications. Market shocks cause massive fall in prices so you get a spiraling fall in prices. The possible reasons for the BoE to look into this are Brexit, of course, and any possible market crashes.

“But it is also about consumers. If you have a massive withdrawal of money from funds, you have a problem and that is what the Government have already done and that is pensions freedom.”