Regulation to control bank liquidity has had a disproportionately negative impact on smaller asset managers, according to a new report by financial thinktank New City Initiative.
The report entitled "The Conundrum of Liquidity Regulation" said changes to bank regulation following the global financial crisis transferred risk away from banks and towards asset managers instead.
It argued the "interconnectedness" had been underestimated by regulators with risk just getting moved between different areas of financial services.
"Regulatory changes imposed on the banking sector have pushed liquidity risk on the asset management industry by restricting asset-based or fund-based financing for redemptions.
"This has prompted its own regulatory response: the prior banking regulation has propagated risk elsewhere with likely unintended consequences."
The liquidity regulation changes have meant asset management firms are required to have appropriate liquidity management systems and conduct stress tests to ensure the liquidity profile is consistent.
They must also hold a large amount of assets in the event of a high volume of redemptions, which NCI felt could cause a drag on fund performance.
Going forward, NCI argued smaller firms should be distinguished in future regulation as their investors are fully informed of risks and liquidity transformation and firms are dealing assets in a contrarian manner to index funds.
It also argued this risk regulation is leading to "sub-optimal outcomes" for clients as there is insufficient distinction between asset managers, lack of clarity about the regulation affecting liquidity management and lack of recognition that investors accept liquidity transformation when they invest or could be made aware via fund documentation.
"Regulators and policymakers must accept that smaller asset managers are not of sufficient size to cause systemic risk and therefore treating them in the same way as large fund behemoths is perverse," the report said.
"Smaller asset managers add significant value to investors, can provide liquidity when others cannot, and serve as stabilisers in adverse market conditions."
NCI chairman Jamie Carter said: "As it stands, NCI considers that the current regulation regarding liquidity risk does not sufficiently take into account the differences between different types of asset managers.
"We believe it is important that our members, active managers at small and medium-sized firms, should be positively distinguished in future policy and regulation in light of their ability to act as stabilisers and provide liquidity in situations where others cannot."
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