Central bank support for mutual funds demonstrates the systemic risk that these strategies represent to financial markets, Fitch Ratings warned.
More than $90 billion in support for mutual funds amid the COVID-19 pandemic has been provided by central banks worldwide, the ratings agency said in a non-rating action commentary published Monday.
The scale of this support shows the sensitivity of regulators to the potential risks these funds pose to the financial sector, the commentary said.
Mutual funds represented $55 trillion, or 64% of global GDP, at the end of 2019, up from $24 trillion or 38% of GDP at the end of 2008, according to ICI Global.
Fitch warned that stress within mutual funds could lead to increased volatility in regions or countries where central bank facilities are less widespread, comprehensive or where their effectiveness is constrained. "The magnitude of support brought to bear also suggests that the liquidity management tools available to funds may be inadequate for a severe stress scenario," Fitch said.
India last month became the latest country to implement a support facility for mutual funds, with $6.6 billion of 90-day repo funding made available to banks to allow them to provide liquidity to funds. Earlier in April, six strategies with a combined $4.1 billion in assets under management were gated.