In his address to the Thomson Reuters’ 3rd Australian Regulatory Summit in Sydney on Wednesday, Reserve Bank of Australia Deputy Governor Philip Lowe said disruptions in the asset management industry can be managed. Lowe called for examination of what role regulations and central banks play in addressing the risks.
The extent to which liquidity regulations are prescriptive, the merits of alternatives to fund freezes, such as exit fees and liquidity gates, and the role central banks should play when markets freeze and liquid assets cannot be traders were listed as relevant issues by the central bank official.
Lowe feels there is still way to go to rebuild the trust in finance even as regulators and financial institutions have sought to reduce the probability of a repeat of the crisis.
Lowe said many of the regulatory initiatives point to address risks that arise when the financial system undertakes maturity transformation. That is, when it transforms illiquid longer-term assets into liquid assets.
He termed at-call bank deposit as an example for this type of transformation. The deposits are primarily invested in assets, namely bank loans, which are not particularly liquid and have long maturities. In turn, these bank loans fund the creation of real assets in the economy, which are not particularly liquid, he added.
Lowe said the various efforts for the risks associated with maturity transformation have focused on bank balance sheets strengthening and liquidity management, which includes Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR).
Australian dollar denominated liquid assets are now equivalent to about 7 percent of banks’ total assets, up from around 1 percent in early 2008. He said the significant changes on the liabilities side has been a shift away from short-term wholesale debt towards deposits.
Deposits now accounted for a little below 60 percent of the Australian banks’ total funding compared to around 40 percent in early 2008. Lowe said the switch has increased the effective maturity of banks’ liabilities in a stress event, even if it has not increased the contractual maturity.
In Australia, the assets in managed funds were equivalent to around 40 percent of GDP in the early 1990s, while the figure is 125 percent now, Lowe added. And globally, asset managers are estimated to have around $76 trillion in assets under management, equivalent to around 55 percent of global banking assets, he said.
“Globally, there is considerable effort being devoted to understanding the nature of the risks in this area… A related stream of work – which in some way parallels similar work for the banking industry – is to examine what role regulation should play in addressing the various risks and what role the central bank should play,” Lowe said.
The material has been provided by InstaForex Company – www.instaforex.com