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March 6, 2014

Risk is greatest when there is no perception of risk

“Should the biggest fund management groups be regulated as systemically important financial groups, in the same way as the biggest global banks? The US Treasury’s Office of Financial Research has asked this question, and is inclined to answer “yes”. The fund management industry disagrees.”

“The question is central to the attempt to engineer a financial system, post-Lehman, that is fit for purpose. It is also very hard.”

“Let us start with a clear distinction. Regulated fund managers are agents. They invest other people’s money, and create funds as separate legal entities from the companies that manage them. And – in the regulated space at least – they do not borrow against the assets they hold in their funds. In each of these respects, they differ from universal banks that have leverage, and invest their own money.”

“A big bank can create systemic risk by borrowing too much, and then suffering enough losses on its loans to wipe out its capital. At that point, it inflicts losses on all those who have lent to it and – if the bank is as big as Lehman Brothers was – a systemic financial crisis can ensue.”


Read full Financial Times article here.

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