CENTRAL BANKS PROP UP FUND INDUSTRY WITH $100BN INJECTION /THE FINANCIAL TIMES

Central banks prop up fund industry with $100bn injection

Fitch says scale of support points to the systemic importance of $55tn asset management market

Siobhan Riding in London


Jay Powell’s US Fed made a $51bn liquidity injection to help money market funds meet redemption requests © Getty Images


Central banks have injected close to $100bn to prop up investment funds hit by the coronavirus-induced market turmoil, raising fresh questions about the systemic risks posed by the asset management industry.

Monetary authorities including the US Federal Reserve and the Reserve Bank of India stepped in to relieve stress on their fund markets after the escalating health crisis triggered heavy fund outflows and sharp falls in asset prices. Central banks have provided support totalling $93.8bn to funds since the emergency began, according to rating agency Fitch.

The figure will provide fresh ammunition to policymakers concerned that the fund industry could be the locus of the next financial crisis. In April, the IMF warned that further outflows from vulnerable bond funds risked running down managers’ cash buffers, triggering renewed turbulence and clogging up credit markets.

It could also revive a debate about whether funds such as money market funds should be subject to bank-like supervision.

The most aggressive central bank contribution came from the Fed’s backstop aimed at helping US money market funds meet redemption requests. The programme has delivered a $51bn liquidity injection to the country’s $3.8tn money market fund sector.

In addition, the US central bank in March appointed BlackRock to manage two Fed-backed special-purpose vehicles to buy primary and secondary market corporate bonds. One of the vehicles has bought investment-grade exchange traded funds, marking the first time the Fed has included ETFs in this type of purchasing programme.

Mutual fund support facilities provided by monetary authorities in Thailand, India and Colombia respectively total $31.2bn, $6.6bn and $5bn, Fitch said.

The interventions were aimed at preventing contagion stemming from investor runs on several large funds. In late April, the Indian arm of US fund manager Franklin Templeton suspended six local bond funds managing more than $3bn after jittery investors pulled their cash.

Alastair Sewell, head of fund and asset manager ratings for Emea and Apac at Fitch, said the scale of central bank support was evidence of “regulators’ sensitivity to the potential systemic risks that funds pose through spillover effects to financial markets”.

Investment management has grown significantly since the last crisis, now controlling assets of about $55tn, compared with $24tn in 2008, according to the Investment Company Institute, the US trade body. Fitch estimates the industry’s asset pool is now equal to 64 per cent of global GDP, versus 38 per cent in 2008.

Despite this, fund managers maintain they are not “systemically important” in the same way as banks, arguing their agency business model means that losses befall investors in individual funds, not asset managers themselves.

They also point to risk management tools at their disposal that help mitigate the possibility of a liquidity mismatch arising in funds.But Mr Sewell said central bank support indicated liquidity management tools “may be inadequate for a severe stress scenario”.

In Europe, where the local fund industry has not benefited from direct central bank support, more than 80 funds managing assets of more than $40bn were forced to suspend in March after failing to meet redemption requests.

Although a small section of the €17.7tn European fund market, it nevertheless casts doubt on whether asset management regulations “fully address the liquidity risk that may materialise in a severe stress scenario”, Mr Sewell said.

Tanguy van de Werve, director-general of the European Fund and Asset Management Association, said the Fed’s intervention was not evidence of asset management’s systemic importance, arguing the fund liquidity facility’s main objective was to reboot trading in commercial paper, in which money market funds invest.

But Mr Sewell said had the Fed not acted, the pressures on US prime money market funds would have intensified, with weak market liquidity compromising managers’ efforts to meet redemption requests in an orderly fashion.

Paul Schott Stevens, chief executive of the Washington-based ICI, said the “powerful psychological effect” of the Fed’s action was greater than its financial impact.

He said the amount of liquidity it had supplied to funds was less than half the balance of a similar facility at the same point in 2008.