Asset managers should be candidates for stress tests, top Bank of Italy official says

Regulators world-wide should consider subjecting asset managers to stress tests, a top Bank of Italy official said, adding to the chorus of bank authorities flagging nonbank risks.

Potential threats posed by asset managers “are too new, too complex and too little understood for any complacency,” the Italian central bank’s deputy governor, Luigi Signorini, said in a speech* this week. “The work on stress-testing tools for nonbanks is still in its infancy.”

The asset-management sector has resisted previous calls for stress tests.

In the US, concentration among asset managers has increased in recent decades.

Signorini noted that the top 10 firms owned 23 percent of publicly traded US stocks in 2016 — up from 5 percent in 1980.

“The commonality of exposures is substantial,” he said. “Evidence suggests that during stress episodes, bonds with concentrated mutual fund ownership tend to experience larger price drops.”

Among the largest US asset managers are BlackRock, Vanguard and State Street Global Advisors.

The Bank of Italy is a member of the Switzerland-based Financial Stability Board, the regulatory coordinator for the Group of 20 economic powers.

Other measures

Signorini said most regulatory policies, such as liquidity requirements, focus on the stability of individual asset managers.

But their effectiveness for addressing systemic risk should be evaluated, he said. In addition, these standards should forbid open-ended funds from investing in illiquid assets, such as derivatives, beyond a certain portion of their portfolios, Signorini said.

He added that central banks’ lender-of-last resort function, which enables them to provide emergency support during a crisis, should be expanded to include nonbanks.

ECB vice president

Signorini’s call echoes that of European Central Bank vice president Luis de Guindos, who said last month that global authorities should develop stress tests to address the systemic threats of nonbanks.

“Nonbanks are subject to lighter regulatory constraints which in some cases allow them to take on more risks,” he said. “If risks were to unwind in a disorderly manner, we could see funding flows dry up, and funding conditions in the real economy affected more broadly.”

In 2017, the FSB recommended that national regulators consider systemwide stress tests of asset managers to better understand their impact on financial stability.

The Securities Industry and Financial Markets Association's asset-management unit had lobbied against the recommendation.

"Stress testing is a flawed concept," said the group, whose members include  BlackRock, Vanguard and State Street Global Advisors. "Implicating all funds in large-scale tests would be an exercise unlikely to yield helpful results."

BlackRock, Vanguard and State Street collectively manage more than $14 trillion in assets.

*Euromed Workshop: "Non-Bank Finance and Financial Intermediation"; Naples, Italy; June 18, 2019.