The rapid growth of the money management industry could have ill effects on the larger global economy, said a report from the Bank for International Settlements.
In its annual report released Sunday, the bank says now that money management firms not affiliated with banks are a major source of credit, those firms could influence “bond market dynamics, with implications for the cost and availability of funding for businesses and households.”
While banks overall have reduced their exposures to riskier assets and are retreating from some capital market activities since the financial crisis, the “ascent of the asset management sector” has led to that industry having more of an impact on “asset price dynamics and ultimately, on the funding costs of governments, businesses and households.”
Because portfolio managers are evaluated on short-term performance and revenues are determined by inflows and outflows by clients, the report says these factors can “exacerbate the pro-cyclicality of asset prices, feeding the market’s momentum in booms and leading to abrupt withdrawals from asset classes in times of stress.”
The mission of the Bank for International Settlements, its website said, is “to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.”
The annual report is available on the BIS’ website.