MNI Policy: BOE Carney Warns Of Asset Management Firesale Risk

By David Robinson

     LONDON (MNI) - A surge in global asset management since the financial

crisis has pumped credit into emerging markets and could raise the risk of

destabilising capital flows, Bank of England Governor Mark Carney said.

     Speaking at the Economic Club of New York Carney, also chair of the

Financial Stability Board, said global authorities need to gather and share data

on asset management to assess the risks of fire sales and contagion.

     The following were Carney's key points, in a speech which contained no

commentary on monetary policy:

     --Global assets under management have grown from around $50 trillion a

decade ago to $80 trillion in 2017, 31 and have accounted for all the increase

in foreign lending to emerging-market economies since the global financial

crisis. This "could increase the risks of sudden stops and feed more intense

capital flow reversals from emerging markets. That is because more than $30

trillion of assets are held in funds that promise daily liquidity to investors

despite investing in potentially illiquid underlying assets."

     --Carney warned that 800 years of history suggested financial crisis occur

roughly once a decade. With the global financial crisis having started a decade

ago, he urged regulators to keep building resilience in the financial sector to

deal with the next one.

     --Risks from shadow banking had diminished in the western world but grown

exponentially in China, adding that the authorities there recognized the threat

and were beginning to act.

     China's "post-crisis performance has increasingly relied on a large

build-up of debt and an associated explosion of shadow banking. The non-bank

finance sector has increased from around 10% of GDP a decade ago to over 100%

now," he said.

     --The UK's banking system was well-placed to withstand the worst plausible

Brexit outcome, a "cliff-edge" Brexit with no trade deal with the European and a

sudden, unanticipated departure from the EU in March next year.

     "We judge that the UK banking system has the capacity to absorb not only

the consequences of a 'no deal no transition' Brexit, but also the losses that

could be associated with intensifying trade tensions, a further sharp tightening

of financing conditions for emerging markets, and substantial additional

misconduct costs," Carney said.

     -Aside from potential losses to banks, a cliff-edge Brexit would raise

liquidity risks. Carney said that the Bank has planned for this with UK based

bank and central counterparties already having built up Stg300 billion of

borrowing capacity at the central bank through pre-positioning collateral, which

is roughly equivalent to their peak borrowing at the height of the global

financial crisis.

     --Carney re-raised the concerns over contract continuity on derivatives and

insurance in the event of a sudden Brexit. The UK is creating a "temporary

permissions" regime to allow EU financial sector firms to service contracts but

the EU authorities have yet to reciprocate.

     Carney's Deputy Governor, Jon Cunliffe, however, told the Treasury

Committee this week that his best guess was that something would be sorted out

and Carney remarked that talks were continuing with the European Central Bank on

the issue.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com