Article: The Systemic Importance of Asset Managers: A Case Study for the Future of SIFI Regulation

Abstract

The nexus between financial stability and the asset management industry remains understudied. I question whether asset managers and/or investment funds could be systemically important, and if so, how financial regulation in the EU and US should cope with this. From a review of the available economic literature and policy standpoints, it emerges that asset managers and the funds that they manage can create systemic risk through fire sales. While in some cases nonbanks can be designated as systemically important under EU and US law, asset managers and investment funds do not fit well in this framework. Consequently, the current rules, concerning both designation and subsequent regulation, fall short. Instead, a simple designation rule could directly address the way in which asset managers can cause or amplify systemic risk. Regulation and supervision should equally address this fire sale risk. I propose a market-based prudential measure, complemented by centralised supervision, that does so. The case of systemically important asset managers shows that current SIFI regulation does not sufficiently account for the systemic risks that can and will be caused by nonbank financial institutions. I therefore advocate a rethink, such that it has a wider institutional scope but more accurately addresses sectoral differences. Financial stability, systemic risk, systemically important financial institutions, nonbank financial institutions, asset management, investment funds, SIFI regulation, fire sales, EU law, US law.