Systemic risk: Fink calls for big thinking

BlackRock Inc. Chairman and CEO Laurence D. Fink believes that, when it comes to designating asset managers as systemically important financial institutions, most decision-makers and global regulators are going about it the wrong way.

In an interview June 16 with Pensions & Investments at P&I's Global Future of Retirement conference, Mr. Fink explained that, in order to minimize systemic risk within the financial services industry, regulators need to look at the big picture rather than regulating individual institutions.

“A few senior banking regulators are finally starting to understand that they can't regulate an institution, but they need to regulate the activities of all institutions,” he said. “That's what we've been advocating now for seven years.”

He pointed out that when regulators talk about asset managers, they're focusing on a group that represents only about 20% of asset owners. And if regulators are trying to minimize systemic risk within the financial system, it doesn't make much sense to “only regulate a component of the entire capital market.”

Since the financial crisis, part of the Basel-based Financial Stability Board's mandate has been to ensure that financial institutions, and most specifically banks, would no longer jeopardize society like they did in 2007 and 2008, Mr. Fink said. So, the FSB has been reviewing the global financial markets arena to see if there are other examples of where there could be systemic risk.

And although Mr. Fink said that the work of such organizations as the FSB and International Organization of Securities Commissions have made banks much safer than they were in 2007, there are some flaws in the way that SIFI designations are being made.

“Most of the decision-makers worldwide in the SIFI designations rest on banking regulators - very few securities regulators,” he said. “So first and foremost, the problem is that bank regulators are acting like bank regulators; everything looks like a bank to them.”

The other problem, as Mr. Fink sees it, is that if regulators want to indeed be the macroprudential regulators they are aspiring to be, then they need to know about the institutions and the capital markets that they're going to regulate. And the BlackRock CEO doesn't believe that the regulators that offer advice on SIFI designations to-date “have a full understanding of what the role and responsibilities of asset managers are,” or what the role and responsibilities of institutional investors and central banks are.

“If you believe that leverage in capital markets is something you have to watch, you have to watch that across the whole spectrum.”

Mr. Fink also noted that regulators are beginning to acknowledge that, in order to mitigate systemic risk in the capital market, they should look at vehicles that use excessive leverage. As examples, he pointed to hedge fund Long-Term Capital in 1998 and leveraged banks that experienced a liquidity crisis in 2008, both of which created havoc in the marketplace because of too much leverage.

“If you want to really look at and understand the system, it's going to have to be understanding these anomalies, these institutions that are making their money through large sums of leverage,” he explained.

Regulators are indeed beginning to share Mr. Fink's thoughts on the matter. IOSCO chairman Greg Medcraft recently said publicly that, after William H. Gross' leaving Pacific Investment Management Co. last year caused no market turmoil, he believes regulators should refrain from treating asset managers like big banks.

In addition to discussing SIFI designations with P&I, Mr. Fink also talked about BlackRock getting into impact investing more.

“We've been providing some form of impact investing for many, many years,” he explained. “But as our clients are seeking more information on this category, it was clear that we needed to be more organized.”

This is one of the major reasons why the new business unit, BlackRock Impact, was launched earlier this year.

Mr. Fink said that the industry needs to be more proactive with engaging in impact investing. “We need to attack this in a more forceful way,” he told P&I.

During a session at the conference, Mr. Fink told attendees his thoughts about infrastructure investing, and how such investing is not only “a major component of future growth,” for BlackRock, but also “as a mechanism for us to be an impact investor in countries around the world.”

BlackRock, which currently has about $6 billion in infrastructure, could see that part of the business grow up to about $30 billion in the future.