Asset managers could pose risks to the US financial system when reaching for higher returns, herding into popular asset classes or amplifying price movements with leverage, according to a study released by the US Department of the Treasury’s Office of Financial Research (OFR).
The finding that the asset-management industry is ‘vulnerable to shocks’ has boosted the likelihood the largest such firms such as BlackRock and Fidelity Investments would face tougher federal scrutiny.
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The report, Asset Management and Financial Stability, T notes that significant gaps in data about the asset management industry limited the study’s ability to evaluate potential threats and their implications for financial stability.
However, the report did not draw any conclusions about particular asset managers or whether any firms should be designated as potentially risky to the broader market.
The report said the industry is "highly concentrated" and includes nine US-based firms that each have more than US$1 trillion under management globally. Even if those firms weren’t themselves a catalyst of financial distress, they play a role in so many financial markets that they "could contribute to the transmission or amplification of risks from one market sector to another" in a crisis, the report said.
"Risk-management practices and structures vary significantly among" asset managers, the report added.
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By GlobalDataThe council is authorized under the Dodd-Frank financial regulatory law to identify companies that could pose a threat to stability. The Fed can impose on such firms tighter capital, leverage and liquidity rules and demand measures including stress-testing and wind-down plans.
The council is led by Treasury Secretary Jacob Lew and includes Fed Chairman Ben Bernanke.
