Donald Markwardt
Senior Research Analyst, International Finance and Macroeconomics Research
Capital Flows and Systemic Risk
Donald Markwardt is a senior research analyst in international finance and macroeconomics at the Milken Institute. He studies topics relating to systemic risk, capital flows and investment. Concentrating on systemic risk assessment in the financial system, his recent work focuses on liquidity and financial stability in the asset management industry.
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Asset Managers and Systemic Risk: Moving Beyond ‘Too Big to Fail’ 

By: Donald Markwardt
June 14, 2016

In the aftermath of the global financial crisis, regulators have been on alert for financial institutions that are “too big to fail.” And for good reason: The meltdown of highly leveraged banks dragged the entire global economy down along with it. Since then, they have been on a mission to reduce risk-taking at large banks and move riskier activities such as proprietary trading off the books of financial institutions that have been deemed “systemically important.” 

It’s only natural, then, that these activities have migrated elsewhere. At the recent 2016 Milken Institute Global Conference session “The Age of Asset Management: Harbinger of Stability or Chaos?” panelists noted an increase in direct investment and asset managers—such as mutual funds, hedge funds, and private equity—stepping in to fill the gap left by banks.

Regulators, feeling that banks are relatively in hand, have been looking at these nonbank financial intermediaries and asset managers in particular with greater scrutiny. That scrutiny starts with the observation that the largest asset managers oversee more assets than the largest banks. Surely these managers must also be considered systemically important. Right? 

Largest U.S. Banks vs. Asset Managers


Total assets (billions)

Financial leverage

 Asset Managers

Assets under management (billions)

Gross fund leverage

JPMorgan Chase

$ 2,423



 $ 4,652


Bank of America

 $ 2,185



 $ 3,148


Wells Fargo

 $ 1,788


State Street Global Advisors

 $ 2,448



 $ 1,731


Fidelity Investments

 $ 1,974


Sources: Bloomberg, Morningstar, Northern Trust, author’s calculations.
Note: Gross leverage estimated using reported gross long plus gross short exposures of open end, closed end, exchange-traded funds, and separate accounts.

As noted during the Global Conference panel and as we discuss in our upcoming research report on asset managers and systemic risk, banks and asset managers are not comparable in terms of the hazards they pose to the financial system. Asset managers do not take on nearly the same level of leverage and do not guarantee balances in customer accounts as banks do with deposits. They merely act as an agent for investors. Panelists remarked that they are “distributors of risk”—they “move” assets rather than “create” them—without balance-sheet risk in a fragmented industry, so the analogy to the concentration risk of large, systemically important banks does not apply.

After careful consideration, financial market supervisors in the U.S. appear to agree with this assessment. Federal Reserve Gov. Daniel Tarullo—the Fed’s “point man for regulatory reform” —recently remarked that regulators would likely focus on risk factors affecting the industry as a whole rather than attempt to classify bigger asset managers as SIFIs.

Indeed, it is worth being mindful of the risk factors specific to the asset management industry. One in particular is the risk tied to mismatched liquidity on many types of fixed-income funds. For example, investors have poured hundreds of billions of dollars into high-yield mutual funds and ETFs that offer investors the ability to redeem their shares for cash at the end of the day or even intraday. The high-yield bonds underlying the funds as assets, however, are highly illiquid and can take days or weeks to attract a counterparty willing to trade them at a fair price. This disconnect could theoretically lead to significant problems if investors try to redeem their mutual fund shares all at once and funds are forced to liquidate holdings at fire-sale prices.

After years devoted to implementing Dodd-Frank requirements, regulatory agencies such as the SEC finally appear to have the bandwidth to begin dealing with rules regarding leveraged ETFs and requiring formal liquidity management programs. Implementing simple rules that consider the dynamic relationship between financial regulation and financial activity will be essential.

Watch the Age of Asset Management: Harbinger of Stability or Chaos?