September 21, 2020

The ECB warns of the risk of financial collapse due to the massive sale of funds | Markets

The ECB warns of the risk of financial collapse due to the massive sale of funds | Markets



The European Central Bank (ECB) He has sounded the alarm. The exponential growth that the investment fund industry has had, together with its multiple interconnections with the banking sector and with debt issuers, has created a threat that can destabilize the system and create a financial collapse.

The one in charge of drawing attention to the dangers that have been created by the strong development of this industry has been the vice president of the ECB, Luis de Guindos, in a speech pronounced yesterday in Frankfurt, in a few financial days.

Guindos recalled to hundreds of bankers and managers that The wealth managed by European investment funds has tripled in the last decade, to add more than 12 billion euros. If in 2008 their managed assets were equivalent to 15% of bank assets, at the end of 2017 they already represent 42%.

The solutions

  • Liquidity. Guindos suggested that national supervisors could establish a minimum liquidity for the funds and a schedule for the withdrawal of money by customers.
  • Supervisor. Due to the high interconnection of investment funds with different jurisdictions, the ECB advocates some type of community super-dividend.

"This strong growth in terms of size could have important implications for system capacity [financiero] to absorb shocks and for the situation of the economy in general, "he said. Sour cherries.

The former Spanish Minister of the Economy considers that one of the great dangers involved in the large size of the fund industry is that there is a massive withdrawal of money by customers. "The liquidity of the system could be compromised quickly if many individuals decide to withdraw money from their funds at the same time," he explained.

The ECB vice president said he was "seriously concerned about the reduction of liquidity in the system and the role that the investment fund industry could play in a scenario of stress on financial conditions."

The liquidity of the exchange traded funds (ETF) is another concern of the financial supervisor

Sour cherries also warned of the rapid growth of quoted funds (ETF, for its acronym in English), a type of asset similar to mutual funds, which replicates the evolution of stock indexes (such as the Ibex or the Nasdaq) and bonds. "They are increasingly entering into fixed income, and there is no experience of liquidity capacity can offer in situations of stress," he said.

In addition, Guindos warned about the rapid development of alternative funds that have levels of leverage that, sometimes, the authorities are unaware of.

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