IMF seeks stress tests for asset managers

The International Monetary Fund has called for a regulatory crackdown on asset managers, including the introduction of stress tests that would mirror those in place for the banking system.

The call, encompassed in one of the analytical chapters of the IMF's twice-yearly Global Financial Stability Report, will bring under closer scrutiny an industry that has expanded greatly in size and importance since the financial crisis.

Fund managers buy and sell securities worth $76tn, 40 per cent more than 10 years ago and an amount equivalent in size to the world economy. BlackRock, the world's biggest fund, has $4.7tn under management.

The industry has filled a void left by banks, which have withdrawn from several markets because of capital rules that make it more expensive to keep large trading books. In the US, the Volcker rule has made it more difficult for banks to trade on their own account, a practice known as proprietary trading.

"The regulators are trying to make the system safer. But the problem is that a lot of the risk is just being moved towards the asset managers from the banks," said Vincent Vinatier, portfolio manager at Axa Investment Managers.

The IMF believes that the risks for global stability associated with the industry are on the rise. This is the result of structural changes in the financial system, as well as of the prolonged period of low interest rates in the world's major economies, which has sparked a hunt for yield among investors and led funds to load up on assets that are not so easy to sell in times of financial stress.

The fund is also concerned about the move of mutual funds into bonds, where "price disruptions . . . have potentially larger consequences than large price swings in equity markets," the report says.

Of the big asset management groups, Vanguard has more than doubled its mutual fund bond holdings to $497bn today compared with $170bn in 2008; Pimco has increased its mutual fund bond assets under management to $404bn from $210bn and BlackRock's have risen to $139bn from $26bn, says Morningstar.

The IMF cautions that buying and selling through funds can increase the probability of distressed sales during a crisis, which can produce destabilising knock-on effects for other institutions. It also warns that asset managers can add to the volatility of international capital flows into and out of emerging markets.

Yet, the fund dismisses the view that the largest asset managers are necessarily the most dangerous from the point of view of financial stability. Instead, it says regulators should focus on the specific activities and products sold by each manager.

The industry has enjoyed lighter-touch regulation than the banking sector, because asset managers let investors bear all the risks and typically avoid relying on short-term funding, which can freeze during a crisis.

However, the report openly calls into question the current regulatory set-up, which the IMF believes "is not set up to fully address risks, neither at the institutional nor systemic level".

The fund calls on regulators to provide a clearer definition of "liquid assets" and to give greater guidance over how to match the liquidity profile of each fund category with its redemption policies. Watchdogs should also consider imposing redemption fees as an attempt to limit fire sales during a crisis.

The IMF argues that regulators should copy the approach taken when supervising banks and introduce regular stress tests for the industry - a step which is currently being considered by the Securities and Exchange Commission in the US.

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