This article was first published on the EFAMA blog.

Last week, economists from the ECB staff published a blog calling for the establishment of 'supervisory colleges' under the coordination of ESMA to supervise some 10 to 15 large cross-border asset management companies active in Europe. They would be considered 'large' not only by the amount of investments they manage, but also their cross-border activities and alleged 'systemic relevance'.

This analysis is flawed on several grounds:

Firstly, it ignores the fundamental differences between banks and asset management companies. In particular, the 'agency' business of asset managers versus the 'principal' one of banks. In other words, while banks invest on their own account, asset managers invest into funds on behalf of their clients. These funds are separate legal entities from the asset management company and their assets ultimately belong to their clients. In the event of a severe market downturn, funds would not face solvency risks like banks do, only potential liquidity risks if many clients wish to redeem their investments at that moment (which is not always be the wisest thing to do or how investors behave in practice). When it comes to liquidity risks, asset managers have a very effective toolkit for dealing with these.

Secondly, looking at all significant episodes of market turmoil in the last two decades, no single regulated asset management company has proven to be 'systemic'. While a few open-ended funds had to temporarily suspend redemptions, there have been zero instances where regulated asset managers, or their funds, have caused the types of issues suggested by the ECB blog. Nor have there been egregious supervisory failures in the prominent jurisdictions they cite. The supervisory interventions mentioned during the Covid-19 crisis were market-wide stabilisation efforts, NOT targeted bailouts of asset managers or the result of supervisory failures.

Thirdly, potential 'systemic' risks are best addressed not by singling out one category of market actors for centralised supervision (or 'colleges'), but rather by taking a holistic view of financial markets, including the specific constraints and interdependencies of several actors.

Overall, system-wide stress tests using reliable data from multiple actors and informed by thematic regulatory deep-dives should drive future policy proposals in this field, not abstract or theoretical speculations.

For more detailed information on the open-ended fund market, it’s risks, and implications for financial stability, please read our 2023 research paper Open-ended funds and resilient capital markets. 

By Federico Cupelli, Deputy Director - Regulatory Policy at EFAMA