In the latest edition of the organisation’s Global Financial Stability Report, the IMF said, given the growth of the asset management sector in recent years as well as the structural changes made to financial systems in the wake of the financial crisis, the sector requires better micro and macroprudential supervision.
“Currently, most securities regulators focus on investor protection and do not intensively supervise risks of individual institutions with the help of risk indicators or stress tests,” the IMF noted, adding: “This practice needs to be changed, supported by global standards on microprudential supervision and more comprehensive data.”
According to the IMF the current oversight framework is not set up to fully address either institutional or systemic risks for a number of reasons.
First, current regulation lacks specificity, particularly in relation to liquidity requirements and liquidity risk managements, the IMF said, adding that “Regulatory requirements themselves also vary substantially across jurisdictions, reflecting the broad-principle-based approach of global standards.”
The second issue noted by the IMF is that there remains generally weak supervision of funds and asset managers across jurisdictions.
Because regular supervision of risks is generally not the focus of supervisors, the organisation found, “no financial soundness indicators have been developed for the industry, and stress testing of funds and AMCs by regulators has been rare—a major contrast with bank supervisory practice.”
However, the IMF also found tha: “Funds’ contributions to systemic risk depend relatively more on their investment focus than on their size, a finding based on on a sample of about 1,500 funds.
And, while it argues that the relative importance of size differs across market segments: “For a given fund size, the systemic risk contribution bears little relation to the size of a fund’s asset management company.”
Thus it said, it will be important to incorporate “product-line and investment-focus perspectives, in addition to mere size”in future oversight discussions and, in particular, when deciding on whether or not to designate an asset management a strategically important Financial Institution.
