Banks and Financial Non-Banking Institutions: the Asset Management Perspective

NBFI is a catch-all term that includes entities that differ substantially, both in terms of business model and in terms of degree of regulation/supervision. Well over the last decade, the contribution of the asset management industry, as an originator and/or transmitter of financial instability, has been grossly over-emphasised, bred by a poor understanding of how asset managers differ from banks. 

Consequently, a ‘one-size-fit-all’ regulatory approach cannot work to identify and contain the often-alleged financial stability risks. On the contrary, we like to remind EU policymakers that asset management is first and foremost an ‘agency’ business, where investment decisions by fund managers are made on behalf of third-party investors. Moreover, if a future EU macroprudential regime proposes to identify potential sources of financial risks, the regime’s scope must necessarily be broader and consider other market entities, which are also able to channel/dispose of vast sums of capital by investing/disinvesting directly. Treating funds differently would inevitably create an un-level playing field that would penalise clients investing through funds.

Despite the frequent claims that there are ‘structural liquidity mismatches’ in the fund sector and that outflows under stressed market conditions are driven by an alleged ‘first-mover advantage’, the evidence to support these claims is scarce at best. Since March 2020, events have shown how volatile liquidity supply can become in times of need, but this temporary scarcity of liquidity – whatever its origins may be - has its roots elsewhere and definitely not in the NBFI space (for instance, Basel III ratios limiting dealer balance sheet capacity at times of stress).

The analysis of market episodes in the narrative of some central banks and international standard-setters remains selective: the March 2020 “dash for cash” and Sept. 2022 LDI episode in the UK have been constantly cited as a practical demonstration for supervisors/policymakers to do more about NBFI. At a more careful look, these episodes however say an awful lot about how the fund industry in particular is already very resilient (e.g. MMFs & UCITS bond funds).

Any new rules or ‘enhancements’ to the existing legislation by the EC would be ill-timed at this juncture, considering a) the very recent conclusion of the UCITS/AIFMD review and pending several of its implementing measures and guidance entrusted to ESMA; and b) the ongoing work of international standard setters (FSB and IOSCO) in reviewing their earlier 2017/2018 recommendations addressing liquidity risks in open-ended funds (OEFs).

The Commission should resist any proposal for public authorities to forcefully impose macroprudential measures ‘top-down’ in an attempt to make markets behave counter-cyclically. Such attempts would also contradict a broadly recognised principle, i.e. that the primary responsibility for fund liquidity management lies with the asset management company.

We call on supervisors/policymakers to resist the immediate temptation of wanting to be seen as doing “something” when financial market complexities combined with poor data do not allow them to accurately assess where fault lines may lie. Better data sharing among authorities will be crucial if any further measures with regard to NBFI are to be taken, including this idea of an EU-wide macroprudential regime.

Efforts in this regard are being made at streamlining supervisory reporting. The co-legislators reached a political agreement on the EU reporting reduction package in December 2024 and, in Q3 2024, ESMA began considering integrating reporting in the fund sector, notably by sharing data already available in ECB fund inventories. An ESMA consultation is expected to be published mid-2025 on these precise points.

Lastly, a few words on the recent conclusions of the Bank of England’s System-wide Exploratory Scenario (SWES): The SWES approach taken the BoE is a prudent one in that it shortlisted key financial institutions, surveyed them and worked with them to pin-point tangible risks in the system. The validity of this approach is that it remains an exploratory scenario aimed at better understanding crucial interlinkages as an initial step and one devoid of any tentative policy prescription. An important lesson learned was that reporting data was not sufficient: the bulk of the data used to inform the exercise was obtained via ad hoc requests to supervised entities, thereby saying a lot about how partial current reporting requirements are. Scaling this experiment on an EU-wide level will necessarily need to be an interactive process (and thus demand huge resources from the financial industry and public supervisors alike).