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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

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