While the categorization of certain large, global money managers and some investment funds as systemically important financial institutions might increase costs, it also could increase innovation in the industry.
Under the Financial Stability Board and International Organization of Securities Commissions' second consultation paper assessing non-bank and non-insurers for SIFI designation, investment funds above $100 billion in size are set to be caught in the net. A money manager that does not qualify as large enough to be deemed systemically important — if it has less than $100 billion in balance sheet assets, or $1 trillion in assets under management — can still be caught in the investment fund SIFI net, because these methodologies would be applied separately.
“If a fund is at the cusp of reaching that size, its asset manager could have some incentive to make sure that it does not exceed this threshold,” said Vanessa Robert, vice president, senior credit officer in Paris at Moody's Investors Service Inc. “Nevertheless, asset management companies want to maintain and increase overall AUM, as asset management is a volume business. Therefore, (they) might be incentivized to spread their overall AUM along an increased range of products. That is where we think this will lead investment firms to be creative on the product front.”
Ms. Robert said there also was a positive in terms of business model, related to strategy innovation. “It is also good to diversify the range of products so that, if there is an issue with an asset class, or the market is not very favorable to an asset class, (money managers) have alternative products that can attract business,” she said.
Moody's sees the potential designation as credit positive for debtholders of money management firms. “But let's also recognize that the SIFI designation comes with costs — compliance costs, higher required capital and more stringent risk assessment,” Ms. Robert said.
The call for increased scrutiny and testing of money managers has not been confined to the auspices of the FSB and IOSCO's consultation papers. U.S. regulators have in the past suggested that money managers should be subject to stress tests, akin to those in the global banking system.
And last week, Alex Brazier, executive director, financial stability strategy and risk at the Bank of England, gave evidence before the U.K.'s Treasury Select Committee following his appointment as a member of the Financial Policy Committee.
Highlighting the work of the FPC, which Mr. Brazier said so far has focused largely on the banking system and how to restore resilience in that sector, he said: “I think there is a need now to broaden that a bit more and to look more closely at the risks outside the parameters of the banking system, and at so-called market-based finance.”
When questioned further, Mr. Brazier elaborated that central counterparties and insurance should be considered. “And there is a third — the asset management sector, which has grown extremely quickly over the past decade and poses some particular risks to financial stability.”
Mr. Brazier did not explain the particular risks, but he said “these are things we should think about incorporating both in the annual stress test over time, but also in ad hoc individual stress tests as well.”