The Financial Stability Board (FSB) may label investment funds that manage over $100 billion in assets as too big to fail.
FSB and International Organisation of Securities Commission (IOSCO) said in a consultation paper published last week that it is now compiling a list of asset managers whose distress or failure could cause a Lehman-style event.
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SIFI tag for $100 billion asset managers
The consultation white paper published last week indicated asset managers with over $100 billion under management would be considered ‘systemically important financial institutions’.
The FSB said in the consultation paper because of their size, complexity and systemic inter-connectedness, they would cause significant disruption to the wider financial system and economic activity if they were to fail a disorderly manner.
Banks have already been subjected to more onerous capital requirements through Basel III guidelines. Hence it is felt if FSB’s latest proposals go through, asset managers would also be subjected to more stringent requirements.
BOE hinted at bank breakup
As already reported by us, Bank of England CEO Andrew Haldane indicated evidence that pointed to the optimal size of a bank as under $100 billion (£62 billion). However, he noted the big banks are even bigger than before the crisis, with Barclays PLC (NYSE:BCS) (LON:BARC)’s balance sheet of £1.5 trillion, Royal Bank of Scotland Group plc (NYSE:RBS) (LON:RBS) (AMS:RBS)’s £1.37 trillion, and Lloyds Banking Group PLC (NYSE:LYG) (LON:LLOY)’s £930 billion.
He further indicated that to properly address the ‘too-big-to-fail’ problem, regulators should consider doubling banks’ loss-absorbing capital buffers to around 20pc, ‘placing limits on bank size’, or imposing a ‘full separation of investment and commercial banking’ rather than a ring-fence.
Hedge funds with $400 billion to $600 billion
In its last week’s statement, FSB indicated hedge funds with trading activities exceeding a set value of $400 billion to $600 billion would also be assessed by national authorities to gauge whether they need extra rules because their collapse could spark a crisis.
The FSB, which brings together regulators and central bankers from the Group of 20 nations, is ranking banks and insurers by their potential to cause a global meltdown and demanding bigger financial cushions to avert a repeat of the 2008 credit freeze.
Interestingly, FSB points out that as much as 80% of all assets outside of the banking and insurance industries are in the hands of finance companies, broker-dealers and investment funds.
In July, the Financial Stability Oversight Council designated American International Group Inc (NYSE:AIG) and GE Capital systemically important as they could pose a risk to the U.S. economy if they were to falter.