Regulators in doubt: where to wait for a crisis?
The financial crisis seems to have become an expected part of the economic cycle, but they seldom repeat themselves. In 1980-ies. was a hotbed of Latin America, in the late 1990s. – Russia and South-East Asia in 2007-2008. – US banks and the real estate market.
Today, some fear that a new crisis will happen in the asset management sector.
sector companies control $ 87 trillion, of BlackRock investment fund in the world’s biggest manages assets of $ 4.4 trillion, which is higher than the balance of any bank giant.
After the recent financial crisis, regulators have tightened business rules for banks: now they must have more capital and sufficient liquidity to cope with short-term pressures. But it can be an act of “the last and decisive battle.”
Having a situation where banks have sharply reduced their lending, companies are increasingly turning to debt instruments (which are mostly owned by investment funds) for lending, writes the British magazine The Economist.
asset management companies have been the cause of the financial problems in the past.
The collapse in 1998, the hedge fund Long Term Capital Management, which led by industry veterans, professors, and two Nobel Prize winners, has led to this shock on Wall Street and the urgent intervention of the Federal Reserve. Trying to save two hedge fund was one of the main reasons for the collapse of Bear Stearns in 2008
That same year, the money market funds managed by a group of Reserve, announced that the net value of its assets fell below $ 1 ( “break the buck”), with the result that the Fed once again had to intervene urgently.
All these events are quite concerned about the regulators.
In January, the international organization Financial Stability Board (Financial Stability Board) published a consultative paper, which offers qualified Asset management companies as “systemically important financial institutions” and their activities are strictly regulated.
The latest report of the Bank of England expressed concern about pension funds and insurance companies that are no longer performing the role of stabilization in the market and are increasingly using short-term market decline to make a profit by buying cheap assets.
In response, the asset management sector expressed their counterarguments. Firstly, funds act as stewards of capital clients, which is placed in separate accounts (with a third party, they act as gatekeepers). Banks such as Lehman Brothers, on the contrary, speculating customers money on their behalf.
Even if the asset management company will declare bankruptcy, its assets will be transferred to a competitor without losses to investors.
Hundreds of closed-end mutual funds every year, and their care has minimal impact on the market and does not require a rescue from the government.
Secondly, a comparison with incorrectly banks; except for hedge funds, asset management companies tend not to work with borrowed money. BlackRock balance of only $ 8.7 billion, while HSBC is almost $ 2.7 trillion, which is 300 times greater. Thus, the funds less vulnerable to an unexpected drop in prices for assets than banks that confirmed the crisis of 2008
Third, there is little evidence that the asset management company can become a cause of panic in the market. According to a nationwide non-profit organization The Investment Company Institute, the fall of 2008 or the stock market is at its lowest point in the mutual funds accounted for only 6% of all the shares of sales in New York.
All these arguments are quite convincing, and regulators do not hide that they are in a difficult situation, like between a rock and a hard place. Their goal is to anticipate future crises that may not be similar to the past. Following this logic, they are closely monitoring those sectors in which there was no crisis.
This alarm can be compared with the risk to the well-known game “Beat the mole” (Whack-a-mole), when the hammer has one seat and a toy mole jumps out from another location.
Some of the problems that worry regulators were partly their fault. For example, lack of liquidity in the corporate bond market is a result of the restrictions imposed after the crisis. If regulators this time decide to “put pressure” on the investment funds and asset management companies, they can get a situation similar to the game “Beat the mole.”
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