The Systemic Importance of Asset Managers: A Case Study for the Future of SIFI Regulation

Abstract

The global asset management sector has grown spectacularly over the past decade. The influence and societal responsibility of the largest players in this sector have been studied from several perspectives. In this paper, I analyse the nexus between these large asset managers and financial stability. Specifically, I question whether asset managers and/or investment funds could be systemically important, and if so, how financial regulation should cope with this.

I first review the available economic literature and policy standpoints on the extent to which asset managers can cause systemic risk. I find that, on balance, the risk of fire sales is most relevant for the asset management sector. Subsequently, I discuss how the designation of (nonbank) SIFIs takes place under EU and US law and how asset managers and investment funds fit into this framework, noting that this fit is awkward at best.

Both perspectives are combined to answer the aforementioned question. I submit that the current rules, concerning both designation and subsequent regulation, fall short. Instead, I argue in favour of a simple designation rule that directly addresses the way in which asset managers can cause or amplify systemic risk. Subsequent regulation should work in tandem with designation and, as such, also address the specificities of asset managers. Hence, capital buffers, the quintessential tool of bank-inspired SIFI regulation, are not the right tool to address systemic risk in the sector. I propose an alternative prudential measure.

Finally, the case of systemically important asset managers is symptomatic of a broader issue: current SIFI regulation in the EU and the US does not sufficiently account for the systemic risks that can and will be caused by nonbank financial institutions. I therefore advocate a rethink of SIFI regulation such that it has a wider institutional scope but more accurately addresses sectoral differences.

Keywords: financial regulation, financial stability, systemic risk, systemically important financial institutions, asset management, SIFI regulation, EU law, US law

JEL Classification: G23, G28, G38, K23