Asset managers’ increasing activity in the lending market raises new risks and should be counteracted by a renewed emphasis on bank lending, according to the Bank for International Settlements (BIS).
The organisation, whose membership consists of central banks from across the world, said institutional investors’ search for yield was partly to blame for the growth of lending by asset managers.
A chapter from the organisation’s annual report warned: “Even when asset managers operate with low leverage, their investment mandates can give rise to leverage-like behaviour that amplifies and propagates financial stress.”
The report questioned whether asset managers would be able to take over the role played by banks in light of their reduced role in the lending market.
“Financial institutions’ success in performing such functions depends on their capacity to take temporary losses in their stride,” it said.
“But this capacity has recently declined in the asset management sector, where retail investors have been replacing institutional investors as the ultimate risk bearers.”
The restoration of banks as the “successful intermediaries” they were in the past should be the ultimate goal.
The report also touched on the Financial Stability Board’s recent consultation on globally important financial institutions, which a number of asset managers criticised for excluding pension funds from its remit.
It also argued that asset managers should tackle existing incentive-driven fees to ensure their investments are for the long term, which in turn could offset “temporary adverse shocks”.
“Furthermore,” the BIS added, “redemption risk can be addressed by liquidity buffers and – in the spirit of recent amendments to US money market fund rules – by restrictions on rapid redemptions from managed funds.
“This could insulate asset managers from hasty swings in retail investor sentiment, thus boosting the sector’s loss-absorbing capacity.”